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FICA and other tax complications

Posted: Sun Jan 26, 2020 3:08 pm
by SorryTale
The FPR is absolutely the best retirement planning tool I have ever seen. Kudos to its designers.

That said, I would like to point out one thing that makes modeling complex in a way that I think Is unnecessary, and propose what I think is a simple program modification to deal with it.

In order to use the tax feature, you must calculate an effective tax rate and enter it. That is not always easy. For example, My effective rate varies because I pay state and local tax on some of my income streams, but not all of them. I address this by doing some additional calculations which work (at least approximately) to get an effective rate - then figure out what that effective rate is as a percentage of the main rate entered, and say the income stream is partially tax exempt by the percentage. A little bit of a pain, but OK. But what about FICA and/or self-employment tax if the additional income is employment? This makes the tax greater than the primary rate. I then need to calculate these taxes as additional expenses and put them in as "additional input" expenses. Further, I think the "page 1" fields for "annual retirement income" would be interpreted by many people as income from post retirement work. FICA and/or self-employment tax come into play there, but cannot be addressed unless you calculate them and put them in as additional item expenses. I also find the "annual retirement income" field unusable because it offers no end date.

This is what I would suggest. Instead of having a "percent taxable" field for the "additional inputs" that are income, make that field "tax rate". That way a user can assign different tax rates to different income streams without messing with additional calculations. FICA or self-employment can be added to the rate without confusion. And behind the scenes, it is probably slightly (very slightly) easier to program. Secondly, because of the lack of a end date and the FICA and other taxation issues, eliminate the "annual retirement income" field, and force the users to put it in as an "additional input" field, where a tax rate and an end date are both required. I think this is lots clearer for the users, more flexible and I would imagine easier to program then any other solution.

Thanks for reading this. And once again, thanks for your wonderful program!

Re: FICA and other tax complications

Posted: Sun Jan 26, 2020 7:27 pm
by jimr
Thanks for posting these details about the challenges you ran into trying to model your plan and the great workarounds you've come up with. I'm sure others faced with these same challenges will be glad when they find your post.

Your suggestion to add a tax rate to each additional inputs income cash flow entry instead of having the taxable percent is an interesting one. If I were starting over, that might have been a better way to go. It's tough to say because people also like the idea of a having a default rate they can easily change (eg in sensitivity analysis) without having to edit each income cash flow manually. I'm probably a bit bias against your suggestion because changing the way these entries work now is challenging both in terms of migrating existing .frp files, and in terms of folks happy with how it works that wouldn't like a change. Anyhow, I'll make a note of this one and see if I can think of a way to implement it that doesn't change things for folks that are happy with how things work now.

The "annual retirement income" field on the main input page is intended for beginner users with basic plans that just want to get a quick read without having to specify too much detail. Most people just aggregate their social security and any pensions into that field, so having the cash flow continue until the end of plan works fine for them. Again though, that input is more intended for simplistic plans. The idea is to let folks do a quick rough pass through that gives them an interesting (although course) result in just a minute or two.

Re: FICA and other tax complications

Posted: Thu Feb 27, 2020 3:27 pm
by Tanker_62
Thanks for the explanations!

Speaking of tax complications, is it possible to configurate the program so that it accounts for taxes in several countries? Because I was considering getting one of these houses in Greece for when I retire, and I'll have to take that into account.

Re: FICA and other tax complications

Posted: Thu Feb 27, 2020 4:12 pm
by jimr
The planner is a little bit US centric for taxes, but the mechanisms it uses are pretty generic and it's likely you'd be able to adjust things to at least somewhat account for the tax situations in other countries.

Keep in mind that the tax model that the planner uses is intentionally "low resolution" in that the goal is to very coarsely account for the impact of overall taxes on your plan rather than try to precisely model exactly how much you'll have to pay in taxes each year.

Re: FICA and other tax complications

Posted: Fri Feb 28, 2020 5:39 pm
by Tanker_62
Okay, thanks for the explanations, I'll see if I can come up with something to simulate Greek taxes then.