Moneytree Advise’s tax method holds true to its focus on simplicity. It accounts for the expense of taxes by charging every dollar of taxable income for taxes using the provided tax rate. Advisors provide the effective tax rate to use for the projection. The program allows for different tax rates 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.
Entering Taxes in Moneytree Advise
The entry field in the program asks for the clients’ effective Federal and state tax rate. Moneytree Advise applies this tax rate to every dollar of taxable income.
Calculating an Effective Tax Rate:
Calculate the clients’ effective tax rate by dividing their total taxes paid by their 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 Details for Income Sources in Moneytree Advise
Earned income is reduced by the tax rate. 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.
Moneytree Advise assumes 85% taxable Social Security. Even though the possibility exists for lower taxable Social Security. Moneytree Advises uses the 85% assumption for support straightforward and conservative calculations. Reports, such as the Cash Flow Illustration and the Retirement Capital Analysis, show the after tax benefit.
Special or “Other” Income Taxation:
Items entered using the Special Income Planner are not charged taxes in the projection. For incomes subject to taxes, enter the after-tax amount.
Asset Return Taxation:
Moneytree Advise taxes returns on taxable savings and investment type assets annually. This uses a simple and conservative approach, assuming the assets turn over each year. The after-tax growth reinvests into the account. Returns on tax-deferred and retirement plans are not taxed until withdrawal. Taxes never calculate for tax free assets, such as municipal bonds or Roth assets.
Asset Withdrawal Taxation:
Withdrawals from non-qualified tax deferred assets like annuities are fully taxable. The tax deferred annuities page tracks the taxable growth each year. The program determines the starting taxable growth based on the Cost Basis Percentage entered in the Rates input section. Moneytree Advise first takes money from the taxable growth to cover needs. It calculates taxes on those withdrawals. It does not tax withdrawals from the cost basis.
The assumption that taxable accounts turn over each year only applies to future returns. For a cost basis percentage less than 100%, a 15% capital gains rate applies to withdrawals from principal. The cost basis percentage determines what portion of the current balance makes up the cost basis. The remaining portion reflects the untaxed appreciation. Moneytree Advise taxes that appreciation upon withdrawal.
The projections track the Cost basis taxable and annuity assets only. Read more about Cost Basis in Moneytree Advise here.
The program assumes 100% taxable withdrawals from retirement accounts. Tax free account show no taxes upon withdrawal.
Tax Treatment in Other Programs:
Each of Moneytree’s financial planning projections handles taxes with varying levels of complexity.
As discussed in here, Moneytree Advise’s tax method holds true to its focus on simplicity by using the effective tax rate.
Moneytree Plan’s tax methods make up one of the key differences (PDF) between Aspire’s goal-based and Prosper’s cash-flow-based projections.
The treatment of taxes Aspire matches its conservative goal-based focus by using the marginal tax rate as an effective 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 in the File Status/Options tab of the Taxes section.
Accounting for taxes in Prosper supports its optimized cash-flow focus with a detailed annual tax analysis. Prosper 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.