by Carolyn Rothwell on December 11, 2012

Easy Money – Understanding Tax Rates and Override Options

Easy Money uses calculated tax rates based on the client’s current year information.  This post will cover the different tax rates used in the projections and provide examples of when a planner might want to override the calculated tax rate.  

Retirement Projections

Easy Money calculates the client’s marginal tax rate based on current year taxable income.  With no user overrides, the marginal rate is used as the tax rate for the client’s retirement projections.  The tax rate is applied to earned income, pensions, Social Security (of which a portion is set as taxable), interest, qualified plan withdrawals and other taxable income items.  The client’s capital gain rate is also calculated in the current year and is applied all capital gain (and dividends depending on sunset selection) pre and post-retirement.

Data Input Location: Tax Data -> File Status/Options tab
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Both the ordinary income and capital gains tax rates can be overridden for the pre and post retirement period. 

Override Examples:

  • The clients need a basic retirement plan and did not provide the details of their current income and deductions.  The planner can set an assumed tax rate rather than gather more information to have the program calculate the rate. 
  • Client is in the 35% federal marginal tax rate now, but after retirement, client is expected to be in a lower tax bracket of 28%.  The planner can simply override the ordinary income tax rate after retirement.
  • Some planners may use the override to change the projection to reflect a less conservative effective tax rate, rather than the marginal rate.

Disability and Survivor Projections

Easy Money also uses a calculated tax rate for the disability and survivor projections based on current year information.  Unlike the retirement projections, which use the marginal tax rate, the disability and survivor projections use the client’s effective tax rate.

Data Input Location: Survivor

Override Example:

  • Client 1 has a much higher salary.  Without client 1’s income, the client 2 would have a lower rate.  The planner can override the tax rate used for client 2’s projections to a more reflective rate. 

Stock Options Projections

Ordinary income associated with exercising and selling stock options is taxed, by default, at the calculated marginal tax rate.  The tax rated applied to the ordinary income associated with the stock options can be overridden. 

Data Input Location: Stock Options

Overwrite Example:

  • The client is typically in a 28% tax bracket, but will be pushed into the 35% tax bracket when he sells his stock options.  Overriding the ordinary income tax rate in the Stock Options section will allow you to reflect the higher tax rate on his stock options, without having to change the tax rate used for the other years of the projection without stock sales.   


Estate Projections

There is one income tax rate that can be set for the Estate projections, and this rate is not calculated by default.  This is the assumed income tax rate to be applied to qualified plans, which reduces the dollar amount of qualified plans passed to heirs to reflect an after tax value.  The tax rate entered here should reflect the heirs estimated tax rate. 

Data Input Location: Estate -> Estate Assumptions tab
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Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.