Originally from ticket #14675.
Question 1:
In the Other Assumptions section, the program asks for Federal Marginal Tax Rate. Shouldn't it be Effective Tax Rate? There is a big difference.
Answer 1:
On the Other Assumptions page is the tax rate entered the marginal or effective tax rate?
- the default is for you to enter the marginal federal rate and state rate. This will get you a conservative effective rate (i.e. would tend to over tax rather than under tax). A true effective rate is total taxes paid divided into total gross income. If you now that % then enter it DIRECTLY into the effective tax rate box. The value in the effective tax rate boxes are the only ones used in the actual calculations.
Q2:
My federal marginal rate is 25%. My effective federal rate is 13.71% of adjusted gross income (according to TurboTax). The difference affects long term planning results dramatically.
My effective state tax rate is 3.82% of my adjusted gross income for California.
What is the best way to enter both of these rates in Other Assumptions section? Should I just add 13.71% and 3.82%......then put in 17.53% directly in the Total Effective Rate box, even though this may not be exactly correct?
A2:
The correct answer is… put in 17.53% directly in the Total Effective Rate box!
That is the closest way to do it. If you do that don’t touch state or federal
or it will retrigger the mini effective rate calculation.
Q3:
If I enter Annual Job Income on a net basis (after federal & state taxes, social security, medicare, medical insurance, flex plan, etc.), then would I not enter a zero tax rate Before Retirement in the Other Assumptions section? But, if I do that then any other taxable income prior to retirement would not be taxed.
Or, should I enter Annual Job Income on a net basis after all withholdings.....except for federal and state taxes....and complete the Taxes Before Retirement section? But, that would not reflect true total taxable job income.
A3:
Enter job income on a gross basis not net, then enter tax rates.
Job income is only used for estimating soc sec if using builtin estimate, or when contributions are a %of income… either way it needs to be gross.
Q4:
If gross job income is used, then don't paycheck withholdings such a social security, medicare, flexible spending accounts, and medical insurance need to be treated as Special Expenses until retirement? They add up to large amounts over the years.
A4:
In general no it is not looked at or used ….and 401k contributions even if as a % are a % of gross income.
The only case that would factor in is in a couples illustration where one retires before the other and the other one still works. In which case we do apply the job income minus the effective tax rate and minus qualified contributions. So if you are in that situation, then I would agree you could get even more detailed and back off the social security, medicare, flexible spending accounts, and medical insurance.
Otherwise the program doesn’t really look at job income (except for the soc sec estimate and contributions based on % as I mentioned before). Its more for information gathering for you and to get client opening up about their finances.
Q5:
You are exactly right !! I am retired and my wife works.
So, when you say I can "back off" her social security, medicare, FSA, and medical insurance......
do you mean you concur they can be treated as Special Expenses until she retires? (I was concerned because these withholdings reduce her gross income by 21%.)
If so, then I think I've got it.
A5:
Yes you’ve got it!
You can either reduce down the job income amount you enter or as you note
enter them as special expenses so that you are clearer on what they are.
If you enter as special expenses then definitely enter gross income into job income.