Originally from ticket #5578.
How does package factor in $$ needed to pay yearly fed and state tax? I entered $80K for income needs with 4% inflation factor and see $83200 in the income need window for next year, number increasing in future years. I assume the additional $ amounts there due to inflation factor.
I spoke to Rebecca so she has more info if my question not clear
Thanks
Rich 864 270 3997
OK, I am putting in a number of tax issues, just to make sure everything is covered. Please read everything and take what you need informationally from each section...
I) The income goal should be AFTER TAXES.... if you enter tax rates.
The program will then tap the various sources of investments and figure out
how they should be dealt with...
For example, tax free will be tapped with no taxes added or deducted.
Tax deferred however, will have a larger withdrawal so that the net after
taxes will cover the targeted income need.
II) The program does NOT show the exact tax amounts taken out... because it
is an estimate and we don't want every customer calling in on every case
about why the estimated tax amount is too high or too low. The taxes are
taken out of TAX DEFERRED when distributions are made... so if program
calculates they need $10k after taxes from tax deferred and there is a 25%
tax rate... it deducts $13,333 from the balance which nets out to $10k after
taxes.
The expenses and income goal are paid out first in the annual algorithm...
after those deductions... the program then goes back in and accumulates the
"return" on the account.
III) With respect to Investments, this is how taxes are applied:
- Tax Deferred Investments - QUALIFIED: Effective Tax Rate is netted out of all distributions including Required Minimum Distributions. Keep in mind though that the income needs targeted on the income graph are after taxes, so program effectively juices up any needed income amounts to account for taxes. This extra amount is not show separately on the spreadsheet except it is reflected in the balances.
- - Tax Deferred Investments - NON-QUALIFIED: Program tracks the Cost Basis and also the Gain from the growth rate applied. When distributions occur, the Gain is taxed at the Effective Tax Rate and the basis comes out tax free. The program has a fairly complicated algorithm to track how much of each distribution is gain vs. basis and adjusts the taxation accordingly. Similar to QUALIFIED distributions, the program juices up the portion needed to cover the taxes, so that the net amount results in the estimated income needed in any given year.
- Taxable Investments: Effective Tax Rate is netted out of the RETURN on an annual basis. This probably exaggerates the taxation of Taxable investments, but we lean on the CONSERVATIVE side. We do not want to deal with buy/sell dates, holding periods, or cost basis. This is an estimate only. If you have investments with really low cost basis, then you can enter a Special Expense for extra taxation.
- Tax Free Investments: no taxes are netted out on accumulation or withdrawal.
IV) How does the program account for
1. Taxes on Social Security income
- it estimated the % that is taxable using the rules from the SSA and IRS. It is either 0, 50, or 85% taxable. Program will then apply the Retirement Tax Rate to that percentage and show the after tax amount towards the income target.
2. After tax income, i.e., actual tax (apparently the program only uses marginal tax rate)
- yes this is not turbotax... it does just use the effective retirement rate in calculating the various taxes. However, you can divide your taxes paid into your gross income to get an effective rate that is pretty accurate and enter that directly into the effective tax rate box.
3. Minimum distributions from IRA's
- Yes the RMDs are calculated in the program on the Tax Deferred investments. That is why we ask for your birthdate and not just your age. Program calculates your RBD Year and begins the RMDs based on the uniform life table from the IRS.
I really hope this helps, and if we haven't addressed your issue (I think section II answers your question best) then let us know what else we can answer for you...
Thanks!
Rebecca Bannister
Torrid Tech Customer Support
Rich,
Were you able to get what you needed from the info below?
Thanks,
Rebecca
Yeah I believe so. It would be nice to be able to see the before tax number as well as after tax income goal but I understand how you have it set up. Good response on my emailed question. As I did deeper into program I’m sure I will have more questions.
Thanks again
Rich
From: Torrid Tech Support 2 [mailto:notifications-support@torridtech.zendesk.com]
Sent: Monday, April 16, 2012 10:31 AM
To: Rm8251
Subject: [TTech] Re: Tax Question
Great. I am glad that you found the answer helpful.