User Input - Income Tax Rate

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gtam
Posts: 4
Joined: Sun Sep 06, 2020 9:55 am

User Input - Income Tax Rate

Post by gtam »

What Income (Gross, Adjusted Gross or Taxable) does the program utilize the Income Tax Rates to calculate taxes that determine the After Tax Income Column? During working years, should the rate nclude Social Security and Medicare Taxes, along with Federal and State Taxes?

Gross Income = Salary + Dividends + Interest
Adjusted Gross Income = Gross - IRA Contribution - Health Care Deductions
Taxable Income = Adjusted Gross - Federal and State Standard Deductions?

jimr
Posts: 661
Joined: Thu Feb 28, 2008 6:48 pm

Re: User Input - Income Tax Rate

Post by jimr »

The program uses two distinct tax rates to compute taxes in the simulation. The short answer to your question is that both rates should be set as amalgam average tax rates that include all taxes due on the associated income type. The design philosophy for the simulation is to provide a highly simplified tax model with ample user flexibility to adjust the inputs to reflect the real world. It's up to the user to configure these inputs, and any associated income cash flows, to reflect how current and future tax laws may apply to their income.

The Investment tax rate is applied to all gains in the Taxable Portfolio in the year they happen. Conceptually, this includes realized capital gains, unrealized capital gains and dividends, although the simulation's tax model doesn't track different types of investment income separately. The key is that the taxable portfolio is carried at a 100% cost basis by applying the investment tax rate to all portfolio gains each year. This also means that withdrawals from the taxable portfolio don't incur any taxes.

The income tax rate is applied to any income cash flows set up using planner inputs as well as to all withdrawals from the tax deferred portfolio. The income cash flows include "Annual Retirement Income" from the main input page as well as any "income" type cash flows set up in the additional inputs window (social security, pension, annuity income, misc income). The planner's tax model doesn't track the various types of taxes that might be due on various income sources (eg federal, state, FICA, etc). However, you can use the "taxable percent" field in additional inputs income cash flows to adjust how the generic "Income Tax Rate" is applied to each income cash flow.

Tanker_62
Posts: 6
Joined: Tue Feb 25, 2020 2:34 pm

Re: User Input - Income Tax Rate

Post by Tanker_62 »

Thanks for the explanation, it's now clearer for me too. I was wondering, though, does the taxable portfolio include what you already own, or only the income it brings you? Sure, I don't own anything huge like the feadship yacht Anna I got to see with a big (very big) client a couple weeks ago, but I was wondering whether, for example, a holiday house was taxable. I'm fairly sure it is, but does it belong to that taxable portfolio, or to another sub-category?

jimr
Posts: 661
Joined: Thu Feb 28, 2008 6:48 pm

Re: User Input - Income Tax Rate

Post by jimr »

Usually it's easier to handle assets like real-estate outside the portfolio and just enter any one time net cash flows you expect at the time of sale.

If you expect the asset to appreciate at the inflation rate, you can create a "tracks inflation" cash flow. If you expect it to appreciate at a greater or lower rate than inflation, you can enter it as a "fixed cola" cash flow.

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