How Lifetime Planner calculates yearly tax expenses
The Lifetime Planner estimates tax expenses by evaluating the source of your income. The total tax you pay each year is the sum of the various tax rates applied to each type of income you receive.
Taxes on salaries and benefits
You can normally expect one or more of the following types of income each year:
Salaries
Social Security benefits
Pension benefits
If this income is received before your retirement date, it is taxed at the average tax rate before retirement specified in the Average Tax Rate dialog. After retirement, it is taxed at the average tax rate after retirement.
Taxes on distributions from tax-deferred retirement plans
After retirement, you start taking distributions from your tax-deferred investment plans. Most tax-deferred plans, excluding Tax-deferred Annuities and some IRAs, defer taxes on both the original savings and the gains. The Lifetime Planner treats all distributions from these plans as 100% taxable.
Taxes are applied at the average after-retirement tax rate specified in the Average Tax Rate dialog. For example, if you withdraw $10,000 from your tax-deferred savings plan and your post-retirement average tax rate is 10%, the taxes on the withdrawal are $1,000 (10% of $10,000).
Note: Penalties may apply for early withdrawals or withdrawals that are too large. Consult your tax advisor.
Taxes on withdrawals from taxable investments
When you sell taxable investments, you must pay taxes on any unrealized gains. Unlike tax-deferred investments, the original purchase price is not tax-deductible and becomes part of your basis. As your investment grows, the gain is usually realized and taxed each year. (You can set the percentage of taxable gain realized each year in the Rate of return dialog. The default is 100%.)
To determine unrealized gains, the Lifetime Planner:
Calculates an average basis for your taxable investments (original purchase price and reinvested gain).
Divides the total basis by the portfolio value to find the average basis for each investment.
Example: If your taxable investments are worth $100,000 and your total basis is $80,000, your average basis is 80% ($80,000 / $100,000). That means an average of 20% of the portfolio's value is unrealized gain. If you sell $10,000 worth of stock, your estimated gain is $2,000 (20% of $10,000). With a post-retirement tax rate of 10%, your taxes on the withdrawal are $200 (10% of $2,000).
Taxes on other income
Other income is taxed at the individual tax rate you specify for that income. It is usually taxed at your highest marginal rate because it is added to your total income. You can select the tax rate for each type of other income in the Other income dialog.
Taxes on income from a home or asset
Income from a home or asset is taxed at the rate you specify for that income. Since this income adds to your other income, it is likely to be taxed at your highest marginal rate. You can set the tax rate for this income in the Asset Accounts or Planned Assets dialog.
Taxes on gains from the sale of a home
When you sell a home (after May 6, 1997), you are taxed on any realized gain that is not excluded under IRS rules. The Lifetime Planner shows how the gain is calculated in the Asset Accounts or Planned Assets dialog and applies the tax rate you specify for that home.
Taxes on gains from the sale of an asset
Gains from selling assets are calculated as follows:
Sale price – Basis, where basis = Purchase price + Improvements + Selling costs – Depreciation (if any).
The Lifetime Planner taxes the gain at the rate specified in the Asset Accounts or Planned Assets dialog.
Not Available in Canada
This tool is unavailable for users of our Canadian products.