Standard Tax Deduction

A retirement planning tool is only as good as its assumptions and inputs. Share your thoughts or ask questions about the internals of the simulation, built in planner assumptions, or planner inputs.
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Joined: Sat Oct 18, 2014 3:07 pm

Standard Tax Deduction

Post by gg80108 » Sun Mar 17, 2019 10:30 am

How do I enter the standard tax deduction?

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Joined: Thu Feb 28, 2008 6:48 pm

Re: Standard Tax Deduction

Post by jimr » Sun Mar 17, 2019 11:13 am

For most people, the best approach is to enter the AVERAGE tax rate (combining federal and state) that you expect to pay in retirement. The planner's tax model is very crude and doesn't understand deductions or other special tax situations. It leaves it to you to figure all that out based on your circumstances and boil it down into an average overall income tax rate.

This is good example of where sensitivity analysis can help. If you're worried about the reliability of your tax rate estimate, try doubling the rate (or halving it) to see how much it impacts things. If the difference in the success rate is significant, try a 50% increase rather than doubling it and see how much that matters.

For most people a few percent difference in tax rate either way probably won't matter much, but every case is different so you have to test it out for yourself.

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Joined: Fri May 03, 2019 8:17 am

Re: Standard Tax Deduction

Post by joerob58 » Wed May 08, 2019 6:18 am

Good Morning Jim,
I have spent the last few days getting to know another program for retirement planning. That software was good but extremely complicated and not very friendly. I had used FRA a few days before that software and was trying to determine which was best for me and FRA has won the battle - so far. :D
I came across this question on Standard Tax Deduction and thought to throw in my 2 cents worth. Something the other software did was to utilize my Adjusted Gross Income as a starting point and then the software doesn't need to consider income following the STD. Especially now, with the STD as high as it is, it makes sense to start with the AGI and not with the Gross Income. This also provides for utilizing the "effective" tax rates that some tax software, like TurboTax, provides after the return is done.

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