Silver’s tax method holds true to its focus on simplicity. Silver accounts for the expense of taxes by charging every dollar of taxable income for taxes using the provided tax rate. Planners are asked to provide the effective tax rate to use for the projection. The tax rate can set for pre- and post-retirement periods. Learn about the tax method, ways to calculate the clients’s tax rate, and how the tax rate is applied to income sources and assets below.
1. Tax Method: The plan data asks for the clients’ effective tax rate. Silver applies the tax rate to each dollar of taxable income, making the effective tax rate most appropriate.
2. Tax Rate Calculation: To calculate the clients’ effective tax rate divide the total taxes paid by the total income. If you do not have the clients’ tax information several calculators are available to help project tax rates. SmartAsset™ has a simple calculator which estimate the tax amount, marginal rate, and effective tax rates for federal, FICA, state and local taxes. The calculator can be expanded to an advanced mode to account for deductions and exemptions.
Tax Cuts and Jobs Act Update for 2018:
With the rule change, online tax calculators are helpful to estimate a client’s tax liability and determine an appropriate effective tax rate under the TCJA.
3. Earned Income Taxation: Earned income is reduced by the tax rate. Any contributions to retirement plans will reduce the amount of income subject to taxes. The taxes due on earned income are included in the living expenses and taxes column on the Cash Flow Illustration.
4. Social Security Taxation: Silver assumes 85% of Social Security is taxable. It is typical for social security benefits to be 85% taxable, especially for clients with higher income sources in retirement, but the benefit subject to taxation can be lower. Silver uses the 85% assumption to support straightforward and conservative calculations.
6. Special or “Other” Income Taxation: Items entered using the Special Income Planner are not charged taxes in the projection. Enter an after-tax amount if the income would be subject to taxes.
4. Asset Return Taxation: Returns are taxable type assets are taxed each year. This uses a simple and conservative approach, assuming the assets are turned over each year. The after-tax growth is reinvested into the account. Returns on tax-deferred and retirement plans are not taxed until withdrawal. No taxes are charged against tax-free account earnings.
5. Asset Withdrawal Taxation: The assumption that taxable accounts are turned over each year means that withdrawals will not be taxable. Withdrawals from non-qualified tax deferred assets like annuities are fully taxable. There is an exception to this rule, which is when a cost basis has been entered. If the cost basis is less than 100%, withdrawals from principal will be taxed at a 15% capital gains rate. Cost basis is tracked for taxable and annuity assets only. Withdrawals from retirement accounts are assumed to be 100% taxable. Tax free account withdrawals are not taxed.
Tax Treatment in Money Tree’s Financial Planning Software:
Taxes are modeled for in each of Money Tree’s financial planning projections, though handled with varying levels of complexity.
TOTAL’s tax method is one of the key differences between Easy Money’s goal-based and Golden Year’s cash-flow-based projections.
The treatment of taxes Easy Money matches its conservative goal-based focus by using a marginal tax rate. Easy Money calculates the clients’ federal and state marginal tax rate based on current year taxable income. An override option is available to change the tax rate for the pre- and post-retirement periods.
Accounting for taxes in Golden Years supports its optimized cash-flow focus with a detailed annual tax analysis. Golden Years completes a full tax analysis to determine the clients taxable income and calculate taxes using IRS and state tax brackets for each year of the projection.