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Definition:

A pension plan is an employer-sponsored plan that promises employees a certain benefit when they retire.

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What is a pension plan?
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A pension plan is a plan in which an employer guarantees workers a certain benefit. The employer contributes to a pool of funds that is invested in the interests of employees; income from these investments is then paid to workers as retirement benefits. The pension plan differs from a defined contribution pension plan such as 401 (k), where employees save some of their income for retirement and the employer can offset some of the employee contributions. Pension plans place investment risk on the employer, not the employee. This is because pensions are a “defined benefit plan,” meaning workers are promised a certain amount in retirement regardless of return on investment.

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Types of pension plans
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When it comes to employer-sponsored pension plans, there are two main options an employer can offer: a defined benefit pension plan or a defined contribution plan. Both can provide income for employees when they retire, but the way they do it is slightly different.

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Defined benefit plan
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A pension plan is a defined benefit plan. Under this type of plan, the employer promises that the employee will receive a certain monthly income during retirement. The employer invests in the pension plan. Regardless of how the investment works, they still rely on the monthly benefit the employee was promised. If investments are ineffective, the money will have to be taken from the company’s pocket.

Defined benefit plans are still widely used for government employees. In fact, 90% of civil servants still have access to defined benefit plans.

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Defined Contribution Plan
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A defined contribution pension plan is an employer-sponsored plan in which an employee contributes a certain amount of their salary before taxes to a pension plan – most often a 401 (k) plan. In some cases, the employer will match the employee’s contribution with a certain percentage.

Contributions to a defined contribution plan are usually invested, as would be the case in a defined benefit plan. However, in the case of defined contribution plans, it is the employee who makes the investment decisions – and takes the risk. After all, an employee’s retirement allowance depends on the effectiveness of the investment. If investments produce poor results, it means less money for an employee when they retire. But, if investments exceed expectations, then the employee also reaps all the benefits.

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Defined benefit pension VS. defined contribution pension plan
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Pension plans will be better or worse for workers or employers depending on a number of factors. Defined benefit plans and defined contribution plans were originally intended to work together. Pension benefits were supposed to come from three sources (often referred to as a three-legged retirement stool): employer pension, personal retirement savings, and social security.

Most employers chose to contribute to their employees’ pension by contributing a portion of the funds to their 401 (k) rather than providing an employer-funded pension. This may be because they take less risk than they do when using a pension plan, as they do not promise their employees a certain amount of money to retire.

Most employers today only provide defined contribution plans to their employees. This means that they agree to contribute a certain amount to your retirement (usually corresponding to your employee contribution of a certain percentage), but do not guarantee that you will receive a certain monthly income upon retirement.

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How does the pension plan work?
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If an employer offers a pension plan, they will contribute money on behalf of their employees. Employees may also be able to invest in their retirement plans. The employer then invests the money, often in securities, to increase the amount of funds.

Then, when an employee retires, they will receive a payment from the retirement plan, usually in the form of a monthly check. How much money an employee will receive in retirement depends on many factors, including the number of years worked in the company, the amount of money he made while working and his age.

In some cases, you may need to work for a company for a certain number of years before a full entitlement occurs or before you qualify for a pension plan. For example, an employer can contribute to a pension only to employees who have worked for him for at least five years.

There are tax advantages for both employer contributions and employee contributions. Employers receive tax credits for their contributions to the pension plan, and employees can contribute tax-free money – the money is first written off their salary before any taxes are deducted. However, employees must pay taxes on that money when they take it out of the plan during retirement.

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How is the pension paid?
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Pension benefits are usually paid either in a lump sum or in monthly payments for the rest of their lives.

With the lump sum you will receive, you will receive a certain amount upfront. You may be able to invest yourself, perhaps with a higher rate of return than your employer. And if you die soon after retirement, you can leave money to your loved ones. The downside to a one-time withdrawal is that you have a responsibility to ensure there is enough money for the rest of your life.

There are several different ways to make monthly pension payments. You could choose an annuity for one life, which means you get a monthly payment every month for the rest of your life. You can also opt for a joint annuity and survivor’s allowance, which means you receive a monthly payout until you and your spouse die. If you die first, your spouse will continue to receive a monthly payment. In the case of a joint annuity and a survivor annuity, the monthly payment is likely to be lower as payments are expected to last longer.

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Definition:

A net operating loss (NOL) is the incident when a person or corporation has more permissible tax deductions than taxable revenue.

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What does a net operating loss mean?
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A net operating loss happens when a person or business’s available tax deductions exceed their set gross income for the year. The Tax Service allows taxpayers to transfer their losses as a credit to decrease future tax bills. From 2018, the amount of NOL transfer from the previous year is limited to 80% of the current year’s taxable revenue. The taxpayer may transfer NOLs indefinitely, but only if they are used in the sequence in which they are created. NOL transfers are typically the result of corporate losses.
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How NOL works for different categories of taxpayers
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1. Individuals

It is not essential to conduct business to suffer net operating losses. For example, if you have experienced losses due to unintentional damage to your house, vehicle, or personal property as a consequence of a federally recognized natural disaster, you may claim NOL if your deductible losses exceed your income for the tax year.
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2. Individual entrepreneurs and LLC with one participant

The Tax Service considers single proprietors and LLCs with one member to be “end-to-end enterprises” – tax duties are shifted to the individual firm owner. Individual company owners use Table C to disclose their revenues and losses. There is NOL if the whole costs of the firm exceed the total income. This information is then placed into the individual’s tax return to see if a NOL may be claimed.
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3. S-corporations and partnerships

Pass-through entities include S-corporations and partnerships (LLCs with two or more members are treated as partnerships unless they elect to be taxed as corporations). But, because there may be several owners, the amount of revenue and loss that a corporation gets is precisely proportional to each individual’s degree of involvement. Partners or shareholders can assess whether they can report NOL on personal tax returns based on their individual portions of corporate revenue and expenses.
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4. Corporations of type “C”

Category C corporations are taxed on an individual basis. Any NOL generated by the firm is not distributed to the shareholders. In general, the requirements for transferring NOLs are identical for companies. Yet, corporation taxes are quite complicated. Companies will almost certainly wish to consult with a tax expert to establish if they should file NOL.

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NOL carryforward: what is it?
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Carrying over net operating losses (NOL) allows you to deduct losses recorded in the current tax year from taxable income in the next year, reducing your tax responsibilities. NOL can be transferred to future years an endless number of times, although the total amount transferred cannot exceed 80% of the taxable income for that year.

When your NOL reaches 80% of your taxable income for the next year, you can continue to transfer the rest to future years, but you must subtract each NOL in the order in which it was formed. For example, if you have a NOL in 2021, you can apply it to your 2022 taxes as a loan worth up to 80% of your 2022 income. If you receive another NOL in 2023, you must remove the rest of the 2021 NOL before using the 2023 NOL.

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How to calculate NOL?
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The Federal Revenue Service Publication 536 worksheet can be used to determine the NOL. Individuals subtract from their gross income their standard or itemized expenses (heirs and trusts use their taxable income with the addition of some deductions). Furthermore, the table considers capital gains and losses for a person and a firm, income and deductions not connected to the business, and NOL expenses from past years. If the outcome is less than zero, it is NOL.

Imagine that John, a taxpayer, owns a local gift shop and works part-time as a waiter.

For 2022, he files his taxes using Table C and Form 1040. He will also compute his NOL using the IRS net operating loss worksheet.

Income Waiter’s salary = $6,000 Interest from savings account = $200. John’s total income = $6,200

Net loss from gift shop operations (gross income $40,000 – expenses $50,000) = -$10,000

Standard deduction = $12,000. John’s total deductions = $22,000.

John’s deductions amount surpasses his income: $22 000 – $6 200 = $15 800
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NOL

Unfortunately, NOL cannot account for all deductions or revenue. In John’s scenario, he will be unable to claim non-profit deductions (a standard deduction of $12,000) or non-profit income (200 dollars in interest on a savings account).

Non-business deductions (the standard deduction is $12,000) – non-entrepreneurial income ($200 in savings account interest) = $11,800

John deducts the items that were not approved for deduction from the total amount of deductions ($22,000 – $11,800 = $10,200).

John’s 2022 NOL is his income of $6,200 minus his total adjusted deductions of $10,200.

John’s NOL for 2019 = $4,000.
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John can carry over this $4,000 loss to the 2023 tax year to decrease his income tax responsibilities. He can, however, only transfer the NOL, which is equal to 80% of his taxable income in 2022. This implies that if John makes less than $5,000 ($4,000 is 80% of $5,000), he can only transfer a portion of his NOL to 2022. He will then be able to arrange the remaining appointments for 2023.

Businesses with NOL use them as an asset on their balance sheets since they minimize the company’s tax liability. If NOL exceeds 80% of the next year’s income, the remainder can be carried forward as an asset on the company’s balance sheet.

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Definition:

Modified adjusted gross income (MAGI) is your adjusted gross income with the addition of certain tax deductions.

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What is modified adjusted gross income?
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Your family’s modified adjusted gross income is what determines whether you qualify for certain tax savings and deductions. Your MAGI is determined by pre-calculating your adjusted gross income (AGI), which is your income after you have changed it to account for some tax deductions. Then, to find your MAGIs, you have to add some of those deductions back. That’s not a figure you’ll find on your tax return because you have to calculate your MAGI yourself. Depending on your MAGI, you may be eligible for some benefits, including Medicaid insurance, medical plan subsidies under the Healthcare Marketplace, and the ability to contribute to individual retirement accounts such as the Roth IRA.

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Difference between MAGI and AGI
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Adjusted gross income (AGI) and modified adjusted gross income (MAGI) are two digits that can have an impact on your finances. They may be similar in value to each other, but they are not the same thing.

The AGI is the number that appears on your tax return. This number affects your eligibility for certain tax credits and tax exemptions. For example, the AGI determines whether you are entitled (and for what amount you are entitled) to a child tax credit, earned income tax credit, dependent care tax credit, adoption tax credit, and more.

There are also some tax deductions that you are only entitled to if your income falls below a certain level. These deductions include certain itemized deductions, mortgage insurance contributions, charitable contributions, medical expenses, and qualified vehicle taxes.

Depending on your financial situation, your MAGI can be very similar or identical to your AGI – it depends on the case. Your MAGI is required to determine whether you are eligible for certain other deductions. Specifically, your MAGI determines whether you can deduct any contributions you have made to an Individual Retirement Account (IRA) and whether you can contribute to a Roth IRA.

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What does MAGI need for?
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MAGI and Roth IRA

If you were considering opening a Roth IRA, then you should pay special attention to your revised adjusted gross income (MAGI). A Roth IRA is an individual retirement account into which you deposit funds after tax, but then do not pay taxes when you withdraw funds. Only individuals whose MAGI falls under a certain threshold are eligible to contribute to the Roth IRA. At a certain level of MAGI, the amount you can contribute to your Roth IRA is reduced. There is also a level of income at which your eligibility is completely lost.

In 2023, if your income is less than $138,000 (or $218,000 for married couples), you can contribute the full $6,500. If your income is between $138,000 and $153,000 (or between $218,000 and $228,000 for married couples), you can deposit a reduced amount. Finally, if your MAGI exceeds $153,000 for single people and $228,000 for married couples, then you can’t contribute to the Roth IRA.
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MAGI & Traditional IRAs

Your MAGI also plays a vital role if you’re contributing to a traditional IRA. A traditional IRA is one where you can deduct the dollars you contribute to your IRA, but then you pay taxes on the money you withdraw when you retire.

The amount you can contribute to a traditional IRA is the same as a Roth IRA – $6,500 or $7,500  for those aged 50 and over in 2023. But with a traditional IRA, you can contribute as much no matter how high your income is. In the case of a traditional IRA, your MAGI determines whether you can deduct your contributions for tax purposes. Those who are within a certain income range can only receive a partial deduction, while those who exceed a certain income will not be able to receive any deduction at all.

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How to count MAGI?
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1. Determine your gross income

When it comes to determining your adjusted gross income (MAGI), the first step is to determine your total income for the year. Your gross income is the sum of all the income you earned during the year. It can be wages, tips, business income, rental income, retirement income, child support and investment income (usually in the form of capital gains, dividends and interest).
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2. Define your adjusted gross income (AGI)

Once you’ve calculated your total income for the year, it’s time to determine your adjusted gross income (AGI). Your adjusted gross income is your income after you deducted certain non-taxable expenses. Your AGI represents your taxable income before you have accounted for a standard deduction, itemized deductions and any tax relief or exemption you might be entitled to. All this reduces your taxable income.

Deductions you can deduct from your gross income to determine your AGI include:

• Contributions to the Health Savings Account (HSA)
• Health insurance costs (if you are self-employed)
• Contributions to Individual Retirement Account (IRA)
• Student loan interest
• Training and fees
• Teacher costs

Ultimately, the lower your AGI, the less income taxes you will end up paying. Therefore, it is in your interest to take advantage of as many tax deductions as possible to reduce your taxable income.
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3. Calculate your modified adjusted gross income (MAGI)

Once you get your AGI, you can calculate your MAGIs. It won’t appear on your tax form like your AGI, but it shouldn’t be difficult to sort it out. Your MAGI may be very similar to your AGI (in some cases it may even be identical).

To determine your MAGI, you’ll need to add some things back to your AGI. They may refer to:

• Deductions you took for IRA contributions
• Deductions you took for student loan interest as well as tuition
• Self-employment taxes
• Passive income or loss
• Lease losses
• Losses from publicly traded partnerships
• Excluded foreign income

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Definition:

Year-to-Date (YTD) is the period from the beginning of the year to the present.

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What is it?
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Businesses frequently use YTD data to review company trends beginning with the start of a calendar or fiscal year. A fiscal year, like a calendar year, has 12 months, however it does not necessarily begin on January 1. Some businesses begin the fiscal year on July 1. YTD refers to the period from July 1 to the current year in this scenario. A business can use YTD for an income statement or balance sheet, for example, with the same period as the last year. As a result, for the fiscal year opening on January 1, the company’s five-month financial report from the start of the year will include the company’s finances from January 1 to May 31.

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YTD: how to use?
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The fiscal year is a calendar used by some governments and organizations to keep track of their finances. It is still a 12-month period, although it does not always begin on January 1st. The federal government operates on a fiscal year that runs from October 1 to September 30. The fiscal year of many state governments and companies runs from July 1 to June 30 of the next year.

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YTD Financial statements
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Businesses frequently use the YTD data to compare financial results from one year or period to another. They can achieve this by comparing YTD financial statements (such as income statements and balance sheets) from 2 different years.

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Why does YTD matter?
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Comparing the same time from one year to the next might provide a more realistic view of how the business operates.

Let’s take a look at a supermarket. The end of the year is a wonderful time for retail – Black Friday and Christmas shopping often bring in a lot of revenue for businesses. As a result, if a supermarket compared the first three months of 2023 to the last three months of 2022, they could be disappointed. In other words, their revenues may fall from one quarter to the next. It’s not that business is detrimental; it’s just that the company sold more in the fourth quarter than it did in the first. It would be more appropriate for this supermarket to compare the first quarter of 2023 to the first quarter of 2022.

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YTD Revenue‍

Earnings during the current year are money given to the employee since the start of the year. It generally refers to gross income, or an employee’s earnings before taxes. You may also refer to a YTD employee’s net pay, which reflects his profits from the start of the year after taxes and expenses.
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YTD payroll

In the current year’s payroll, remuneration is examined from the perspective of the employer, not the employee. To determine YTD compensation, an employer needs to look at the gross income of each of his employees and add them all together. This analysis will show them how much money they’ve spent on salaries since the start of the year. The payroll at the start of the year might assist the business owner in comparing the current year to the same period previous year. It can also assist them determine whether they are on course to reach their annual budget based on what they planned to spend on staff pay. Indeed, knowing your costs as a business owner is essential.
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YTD returns

The YTD yield is the profit from investments earned since the beginning of the year. You can discuss the yield from the beginning of the year for a single investment, such as a bond or a separate product, or the income from the beginning of the year for the investor’s whole portfolio.

It’s just as easy to calculate your portfolio’s profitability since the beginning of the year. Remove the starting value of your portfolio from the current value. Then, divide the result by the starting amount to calculate the percentage gain over the year. Please keep in mind that this figure is shown as a decimal. Just double the number by 100 to convert it into percentages.

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YTD percentages

The amount of interest you have paid since the beginning of the year is referred to as annual interest. These percentages might be from a school loan, a mortgage, a credit card, or any other sort of interest-bearing debt. Interest generated on a savings account, bonds, or other interest-bearing investments can also be represented by YTD interest.

Assume you have a student loan with a 5% interest rate. When you make a payment each month, some of it goes to the principal (the amount borrowed) and part to interest. Your account should offer a breakdown of how much money was spent on each cost each month, allowing you to estimate your own percentages from the start of the year. Finally, at the end of the year, your lender will issue you a form-1098 E that shows how much interest you paid for the whole year.

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YTD VS. MTD
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MTD is the month before the date, or the time from the start of the month to the most recent full working day. If the current working day has not yet finished, the month before the date is the time between the start of the month and the previous working day.

Assume today is March 23, 2023. The previous day, March 22, was the last full working day of the month. MTD will refer to the period from March 1, 2023 to March 22, 2023 in this situation. A business owner may readily compare the financial data for March 1-22, this year, to the same time last year.

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