Precision FinancialServices, Inc.Michael Babyak, Jr. IIPresident350 US Highway 46Mine Hill, NJ 07803973-927-6300communications@pfs-inc.comwww.precisionfinancial.com

September 2019Social Security: Shoring Up America's SafetyNet

Mutual Funds: Wading into the Passive vs.Active Debate

How can I teach my high school student theimportance of financial literacy?

When should I file the FAFSA?

Precision Monthly

Federal Income Tax: How Did We Get Here?

See disclaimer on final page

April 16, 2019 was animportant day for many ofus. But do you knowwhy? It was Tax FreedomDay — the day when theaverage Americantheoretically earnedenough to pay his or hertax obligations for the

year. According to the Tax Foundation,Americans will pay $3.4 trillion in federal taxesin 2019, more than they spend on food,clothing, and housing combined.* But it wasn'talways this way. In fact, income taxes are afairly new development in the overall history ofAmerica. So how did we get to this point?

In the beginning...The United States was founded, in part, on thepremise that colonists didn't want to pay taxeswithout representation, which led to the famoustossing of tea into the Boston Harbor and theAmerican Revolution. However, not long afterthe colonies gained their freedom fromEngland, Congress passed the Stamp Act of1797, which essentially was our nation's firstestate tax. Otherwise, from the early 1790s to1802, the U.S. government was supported bytaxes on such items as spirits (alcohol, not theghostly kind), sugar, tobacco, and corporatebonds.

Wars played a big part in the history of taxationin this country. To fund the War of 1812,Congress taxed sales of gold, silverware,jewelry, and watches. In 1817, tariffs onimported goods provided the main source ofrevenue to run the government.

With the onset of the Civil War, Congressenacted the nation's first income tax law, theRevenue Act of 1861, which included a flat taxof 3% on annual incomes exceeding $800 tohelp pay for the costs of the war. That tax lawwas repealed and replaced by the Revenue Actof 1862, which established the Office of theCommissioner of Internal Revenue (forerunnerto the Internal Revenue Service), levied excisetaxes on most goods and services, andreplaced the flat tax with a progressive tax.

The 16th AmendmentHowever, it was not until 1913 with the adoptionof the 16th Amendment to the Constitution, thatthe income tax became a permanent fixture inthe American tax system. Congress now hadthe authority to tax income of both individualsand corporations. It didn't take the IRS long tostart inundating us with forms, beginning in1914 with the introduction of the first income taxform, the dreaded Form 1040. Enactment of theRevenue Act of 1916 introduced tax rates andincome scales.

Tax ratesHere's a sobering fact: In 1913, the top federalincome tax bracket was 7% on all income over$500,000, and the lowest tax bracket was 1%.During the Great Depression, Congress raisedthe highest tax bracket to 63%. Wars can beexpensive, as evidenced by the jump in thehighest tax rate to 94% during World War II. In2018, the highest income tax rate was loweredto 37%.

Trying to get it rightOver the years, there have been frequentattempts to reform the tax law in some manner.We've seen the adoption of the alternativeminimum tax, Social Security tax, taxes oncigarettes and alcohol, gasoline taxes, aviationtaxes, property taxes, telecommunication taxes,not to mention state and local taxes. To quoteWill Rogers, "The difference between death andtaxes is death doesn't get worse every timeCongress meets."

Tax laws are always changing and will likelyremain a political hot potato. Only time will tellwhat changes are ahead, but there is no doubtthat through taxation, what the governmentgiveth, it inevitably taketh back again.

*Tax Freedom Day 2019 was April 16, as calculatedby the Tax Foundation, taxfoundation.org.

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Social Security: Shoring Up America's Safety NetEver since a legal secretary named Ida MayFuller received the first Social Securityretirement check in 1940, Americans have beencounting on Social Security to provide much-needed retirement income. For many olderAmericans, Social Security is their main sourceof guaranteed retirement income — income thatcontinues throughout their lifetimes and isindexed for inflation every year (in 2019, thecost-of-living adjustment, or COLA, was 2.8%).

Social Security provides more than justretirement income, though. It also providesdisability and survivor insurance benefits. About62 million people — more than one in six U.S.residents — collected some type of SocialSecurity benefit in 2018, with approximately80% of these recipients receiving SocialSecurity retirement or survivor benefits.1

How Social Security worksSocial Security is a pay-as-you-go system,which means that payments from currentworkers (in the form of payroll taxes) fundbenefits for current beneficiaries. The payrolltax rate for Social Security is 12.4%, with 6.2%paid by the employee and 6.2% paid by theemployer (self-employed individuals pay theentire 12.4%). These payroll taxes aredeposited into the Old-Age and SurvivorsInsurance (OASI) trust fund (for retirement andsurvivor benefits) and the Disability Insurance(DI) trust fund (for disability payments).

Because of demographic and economic factors,including higher retirement rates and lower birthrates, there will be fewer workers perbeneficiary over the long term, worsening thestrain on the trust funds. This year, the trusteesof Social Security reported that the OASI trustfund is projected to run out in 2034. After that,payroll tax revenue alone would be sufficient topay 77% of scheduled benefits.

Ideas for reformThere has been little national consensus bypolicymakers on how to deal with SocialSecurity's looming demographic challenges.Meaningful reform will require broad bipartisansupport, and the trustees have urged Congressto address Social Security's challenges soonerrather than later, so that solutions will be lessdrastic and can be implemented gradually,lessening the impact on the public.

Some Social Security reform proposals on thetable include:

• Raising the current Social Security payroll taxrate — according to the 2019 trustees report,an immediate and permanent payroll taxincrease to 15.1% (up from the current12.4%) would be necessary to address the

long-range revenue shortfall (16.05% if theincrease started in 2035)

• Raising or eliminating the ceiling on wagescurrently subject to Social Security payrolltaxes ($132,900 in 2019)

• Raising the full retirement age beyond thecurrently scheduled age of 67 (for anyoneborn in 1960 or later)

• Reducing future benefits — to address thelong-term revenue shortfall, the trustees havenoted that scheduled benefits would have tobe immediately and permanently reduced byabout 17% for all current and futurebeneficiaries, or by approximately 20% ifreductions were applied only to those whoinitially become eligible for benefits in 2019 orlater

• Changing the formula that is used to calculatebenefits

• Changing the formula that is used to calculatethe annual cost-of-living adjustment forbenefits

Understand your retirement benefitsThe amount you'll receive from Social Securityis based on the number of years you've worked,the amount you've earned over your lifetime,and the age when you file for benefits. Yourbenefit is calculated using a formula that takesinto account your 35 highest earnings years,but you don't need to work for that long toqualify for retirement benefits. Generally, youneed to have earned a minimum of 40 workcredits, which is about 10 years of work in a jobcovered by Social Security. If you haven'tworked long enough to qualify on your own, youmay qualify for spousal benefits based on yourspouse's work record. A spousal benefitclaimed at your full retirement age is generallyequal to 50% of the primary worker's fullbenefit.

You can get an estimate of your future SocialSecurity retirement benefits by visiting theSocial Security website at ssa.gov and usingthe Retirement Estimator tool or by viewingyour Social Security Statement. Yourpersonalized statement contains a detailedrecord of your earnings history, as well asestimates of the retirement, survivor, anddisability benefits you can expect at differentages. To view your statement online, you'll firstneed to register. If you haven't registeredonline, you'll receive your Social SecurityStatement in the mail every year if you are age60 or older and not yet receiving benefits.1 Top Ten Facts About Social Security, Center onBudget and Policy Priorities, August 14, 2018

Future projections

In 2019, the trustees of SocialSecurity reported that theOld-Age and SurvivorsInsurance (OASI) trust fund isprojected to run out in 2034. Atthat time, payroll tax revenuealone would be sufficient to pay77% of scheduled benefits.

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Mutual Funds: Wading into the Passive vs. Active DebateIt's fairly difficult — even for professionalinvestors — to consistently "beat the market."This realization led to the creation of indexmutual funds, which are passively managedinvestment vehicles designed to match theperformance of a particular market index byowning the same securities included in theindex.

Today there are hundreds of indexes and indexfunds tracking various types of assets.1 Still,index funds are not the only game in town, andthere is plenty of discussion in the financialmedia around whether investors are better offusing passive or active investing strategies.

Source: The Wall Street Journal, November 29, 2018

According to Morningstar, just 38% of activeU.S. funds outperformed their benchmarksduring the 12 months ending in December2018, and success rates are even lower overlonger periods. Even so, active and passivefunds tend to perform differently during differentmarket cycles, and they may serve a variety ofpurposes in your portfolio.2

Here are some pros and cons associated withboth types of mutual funds.

A passive approachMany of the well-known, third-party indexes thatare commonly tracked by index mutual fundsare broad based and capitalization weighted.Thus, index investing traditionally involvesbuying all the securities in a market or marketsector and weighting them based on their valuein the marketplace.

Passively managed index funds have lessmanagerial involvement, so fees are oftenlower than they are for actively managed funds.Index funds may also buy and sell assets lessfrequently, and lower turnover may helpminimize distributions subject to the capitalgains tax. Tax efficiency may be an importantconsideration when mutual funds are owned intaxable accounts.

The money flowing in and out of index fundshas become a more powerful force in thefinancial markets, and it's possible that theirstructure may be distorting prices of theindividual assets in the index. For example,when investors buy or sell shares of an indexfund, all of the underlying companies aretreated the same (rewarded or punished)whether they deserve it or not.3

A hands-on strategyActive fund managers strive to outperformbenchmarks by hand picking securities basedon rigorous research and a defined investmentstrategy. Thus, an actively managed fund offersinvestors the chance to outperform the overallmarket, although most of them historically havenot.

An actively managed mutual fund may be morediversified than an index fund holding stocks inthe same asset category, simply because theperformance of a market-weighted index can bedominated by a small number of the largestcompanies. Diversification is a method used tohelp manage investment risk; it does notguarantee a profit or protect against loss.

Active managers also have more flexibility andmay use a variety of trading strategies to helpmanage risks. For these reasons, some activelymanaged funds may offer defensive benefitswhen markets are falling.

Declare a drawThere is no need to pick a side in theactive-versus-passive debate. Depending onyour goals and risk profile, there may be plentyof room in a well-diversified portfolio for bothtypes of mutual funds.

The return and principal value of stocks andmutual funds fluctuate with changes in marketconditions. Shares, when sold, may be worthmore or less than their original cost. Theperformance of an unmanaged index is notindicative of the performance of any specificsecurity. Individuals cannot invest directly in anindex.

Mutual funds are sold by prospectus. Pleaseconsider the investment objectives, risks,charges, and expenses carefully beforeinvesting. The prospectus, which contains thisand other information about the investmentcompany, can be obtained from your financialprofessional. Be sure to read the prospectuscarefully before deciding whether to invest.1-2 Morningstar, 2018-2019

3 Bloomberg.com, December 4, 2018

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Precision FinancialServices, Inc.Michael Babyak, Jr. IIPresident350 US Highway 46Mine Hill, NJ 07803973-927-6300communications@pfs-inc.comwww.precisionfinancial.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019

Investment advice offered throughPFS Partners, LLC, a RegisteredInvestment Advisor.

The opinions voiced in this materialare for general information onlyand are not intended to providespecific advice orrecommendations for anyindividual. To determine whichinvestment(s) may be appropriatefor you, consult your financialadvisor prior to investing. Allperformance referenced ishistorical and is no guarantee offuture results. All indices areunmanaged and cannot beinvested into directly.

The information provided is notintended to be a substitute forspecific individualized tax planningor legal advice. We suggest thatyou consult with a qualified tax orlegal advisor.

When should I file the FAFSA?The FAFSA, which stands forFree Application for FederalStudent Aid, is the federalgovernment's financial aidapplication. The FAFSA is a

prerequisite for federal student loans, grants,and work-study. In addition, colleges typicallyrequire the FAFSA before distributing their ownneed-based aid and, in some cases,merit-based aid.

For the 2020-2021 school year, the FAFSA canbe filed as early as October 1, 2019. Whetheryou have a senior in high school or a returningcollege student, it's a good idea to file theFAFSA as early as possible to increase yourchild's chances of getting financial aid, becausesome aid programs operate on a first-come,first-served basis. (For high school seniors whohaven't yet been accepted at a particularcollege, you can list all the schools your childhas applied to on the form.)

The 2020-2021 FAFSA relies on your family'scurrent asset information and two-year-oldincome information from your 2018 tax return.The form is available online at fafsa.ed.gov.

In order to file the form, you'll need to create anFSA ID if you haven't done so already (be sureto follow the online instructions). You can savetime and minimize errors on the FAFSA byusing the built-in IRS Data Retrieval Tool, whichelectronically imports your tax data.

Even if you don't expect your child to qualify forneed-based aid, you still might considersubmitting the FAFSA. All students attendingcollege at least half-time are eligible for federalunsubsidized Direct Loans regardless offinancial need. So if you want your child to takeout a loan (or your child needs to do so), you'llneed to file the FAFSA. (Unsubsidized DirectLoan amounts are capped each year: $5,500freshman year, $6,500 sophomore year, and$7,500 junior and senior years.)

Keep in mind that you'll need to resubmit theFAFSA each year that you want your child to beconsidered for aid. Fortunately, renewalFAFSAs take less time to complete.

How can I teach my high school student the importanceof financial literacy?Even though your child is justin high school, he or she maystill have to deal with certainfinancial challenges. Whether

this involves saving for an important purchaselike a car or learning how to use a credit cardresponsibly, it's important for your high schoolerto have a basic understanding of financialliteracy concepts in order to manage his or herfinances more effectively.

While financial literacy offerings in schools haveincreased in popularity, a recent study reportedthat only 17 states require high school studentsto take a personal finance course before theygraduate.1 Here are some ways you can teachhigh school students the importance of financialliteracy.

Advocate saving. Encourage your children toset aside a portion of any money they receivefrom an allowance, gift, or job. Be sure to talkabout goals that require a financialcommitment, such as a car, college, and travel.As an added incentive, consider matching thefunds they save for a worthy purpose.

Show them the numbers. Use an onlinecalculator to demonstrate the concept oflong-term investing and the power of compoundinterest. Your children may be surprised to seehow fast invested funds can accumulate,especially when you match or contribute anadditional amount each month.

Let them practice. Let older teens becomeresponsible for paying certain expenses (e.g.,clothing and entertainment). The possibility ofrunning out of their own money might makethem think more carefully about their spendinghabits and choices. It may also encourage themto budget their money more effectively.

Cover the basics. By the time your childrengraduate from high school, they should at leastunderstand the basic concepts of financialliteracy. This includes saving, investing, usingcredit responsibly, debt management, andprotection planning with insurance.1 Survey of the States, Council for EconomicEducation, 2018

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