AGI Method

[Kathleen Reynolds]

#4156

The software offers two options for calculating income taxes: Adjusted Gross Income or Income Tax Rates. This choice is made in the Taxes section of the program.

Select the Adjusted Gross Income

to have the program calculate the income taxes using the Federal Income tax tables each year. The inflation rate (entered in the Main Inputs section) is used to inflate the tax brackets for future years.

The calculation of the income tax on each source of taxable income uses this method:

• Step 1: Calculate the AGI for the year by adding up the taxable income and distribution amounts and the AGI entered in the Taxes section of the program.
• Step 2: Calculate the Tax on this AGI
• Step 3: Calculate the Tax on the AGI minus the Taxable Income
• Step 4: The difference in tax is considered to be the tax on the Taxable Income.

As you can see, this is an extremely accurate calculation that takes into account all parts of the income tax calculation – changing brackets, phase out amounts, and so forth.

To make sure that all taxable distributions are not taxed at the client’s highest tax bracket, the software orders the incomes, so that the AGI in Step 1 above is only the total AGI for the last taxable distribution in the year.

When you select the Adjusted Gross Income method, two tabs appear on the Taxes section:

AGI Tab:

1. Enter the Adjusted Gross Income to use for the analysis. The AGI entered on this screen should not include any distributions from the Retirement Plans, or any income sources entered on the Income and Expenses section. This AGI is used only for positioning in the tax brackets. You can enter up to five different line items for the AGI, or override them by clicking the Override with Custom AGI Values button. For each line item, enter the amount, the annual growth of that amount, the years that AGI applies to, and which alternatives it applies to. Line items with overlapping years get added together in those years.
2. Enter the Tax on Growth of Other Assets. The program assumes that the growth of the Other Assets is taxed at a flat rate.
3. Enter the Estate Analysis AGI to be used when calculating the hypothetical income taxes due at death (illustrated on the Estate Analysis report and the Asset Analysis and Asset Comparison Presentations). This is the AGI of the heirs. Most customers set this AGI to being the same as the Adjusted Gross Income.

Filing Status Tab:

Fill in the tax information for each of the three people. The owner’s tax information will be used while he or she is alive. The spouse’s tax information will be used after the death of the owner. The Oldest Child’s tax information is used after both the owner and spouse are dead. If there is no spouse, don’t worry about the spouse entry fields. They won’t be used.

Application of Section 691(c) Deduction: Use this input to indicate how you want to plan for the Section 691(c) deduction to be used up after the death of the plan owners. Click here for more information.

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