Kathleen ReynoldsKeymasterNovember 17, 2022 at 12:03 amPost count: 428
To use the Income Tax Rates method, be sure that the Income Tax Rates radio button is selected. This button appears near the top of the window under the Tax Options heading.
When you use the Income Tax Rates method, you enter the effective annual income tax rates to use. If you need help finding the correct rates, the program provides a calculator to help you pick the proper rates.
When entering an income tax rate, the income tax rate should include state and federal tax rates. It should include (a) possible state income tax deductions, (b) the possible loss of a full deduction because of the rule reducing itemized deductions by 3% of the AGI for certain high-income taxpayers, and (c) the impact of the alternative minimum tax.
The program calculates the following income taxes:
- Tax on Distributions: Distributions from retirement plans are generally subject to federal income taxes, and in most cases, state and local income taxes. The program can calculate income tax on lump sum distributions with ten-year averaging. This tax rate is also used for any taxable income items you enter.
- Taxes on Roth IRA Conversions: A qualified conversion from one Roth IRA to another Roth IRA is tax-free regardless of the taxpayer’s AGI. However, qualified conversions from Ordinary IRAs to Roth IRAs are considered taxable distributions, and they are taxed accordingly. Also, if conversions occur before age 59½, the conversion amounts are not subject to the 10% penalty tax on pre-age 59½ distributions.
- Taxes on Growth of Other Assets: The program calculates income tax on the liquid portion of the Other Assets fund each year. In the Other Assets section, you can enter a non-liquid balance to reduce taxes. Also, the program allows you to use a capital gains tax rate for growth of Other Assets.
- Income Tax at Death: The balance of the Retirement Plan is still subject to income tax even after the death of the owner. This tax rate is used when calculating the hypothetical tax that would be due if the owner and spouse were to die by the end of each year. It is displayed on the Estate Analysis report and used on the Asset Analysis and Asset Comparison presentations.
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