How are income tax rates treated?

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retiredguy
Posts: 6
Joined: Tue Feb 12, 2019 12:05 pm

How are income tax rates treated?

Post by retiredguy »

When you enter different income tax rates in Additional Input you indicate what years a given entry rate applies to. My question is if I enter an income tax rate for, say, my 56th year, will FRP apply that rate to the income earned in my 56th year or the income taxes paid in my 56th year (which will be based on income earned in the prior year)?

jimr
Posts: 634
Joined: Thu Feb 28, 2008 6:48 pm

Re: How are income tax rates treated?

Post by jimr »

The way the model works, income taxes are calculated and paid within the same year. This is relatively accurate compared to real life because the IRS requires us to make estimated tax payments (either manually or through our employer) to cover taxes that will be due once the year's tax return is completed.

DonovanTal
Posts: 1
Joined: Sat Mar 09, 2019 6:04 am

Re: How are income tax rates treated?

Post by DonovanTal »

How accurate is it exactly to real life, Jim? Have you done some comparisons? I don't have enough data to do it.

jimr
Posts: 634
Joined: Thu Feb 28, 2008 6:48 pm

Re: How are income tax rates treated?

Post by jimr »

Overall, the accuracy of the simulation's approach to taxes is dependent on the numbers you plug in for rates and the exact details of your tax circumstances. My feeling is that this approach gives users the control to "dial in" numbers that make the most sense for them.

IMO, there's really no other reasonable way to model this because future tax rates are unknowable and actual taxes paid will vary wildly from state to state and even from person to person, depending on the totality of circumstances.

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