Calculate yearly tax expenses (Lifetime Planner)

The Lifetime Planner estimates tax expenses by looking at the source of the income. The amount of tax you pay each year is simply the total of the various tax rates you pay on each kind of income you receive. Below is a list of taxable sources of income with information about how the Lifetime Planner computes taxes on them.

• Taxes on salaries and benefits
  Each year you can normally expect one or more of these types of income:

  • Salaries
  • Social Security benefits
  • Pension benefits

  If this income occurs before your retirement date, it is taxed at the average tax rate before retirement that you specify in the Average Tax Rate dialog. If it occurs after retirement, it is taxed at the average tax rate after retirement.
• Taxes on distributions (withdrawals) from tax-deferred retirement plans

  After retirement, you begin taking distributions from your tax-deferred investment plans. With the exception of Tax-deferred Annuities and some IRAs, most tax-deferred plans defer taxes on both the original savings you contribute and the gains you make. Because of this, the Lifetime Planner treats all distributions from tax-deferred plans as 100 percent taxable.

  The income is taxed at the average after-retirement tax rate that you specified in the Average Tax Rate dialog. For example, if you make a $10,000 withdrawal from your tax-deferred savings plan and your post-retirement average tax rate is 10 percent, your taxes on the withdrawal are $1,000 (10 percent * $10,000).

  Remember, there may be penalties for early withdrawals from tax-deferred plans or for withdrawals that are too large. Check with your tax advisor.

• Taxes on withdrawals from taxable investments

  When you sell taxable investments, you must pay taxes on any unrealized gains that you have on the investment.

  Unlike tax-deferred investments, the original purchase price for the investments is not tax-deductible, so it becomes part of your basis. As your taxable investment grows, the gain is usually realized and taxed each year. (You can determine the percentage of taxable gain that is realized each year in the Rate of return dialog. The default is 100 percent or all of the gain realized each year.) So when you sell taxable investments, you usually have an unrealized gain to declare.

  To determine your unrealized gain, the Lifetime Planner calculates an average basis for your taxable investments. That is, the Planner determines the original purchase price and reinvested gain for all the investments in your taxable portfolio. This is the portfolio's total basis.

  The Lifetime Planner divides that total basis by the value of your portfolio to find the average basis for any one investment. For instance, suppose you have $100,000 in taxable investments and your total basis is $80,000. This makes your average basis 80 percent ($80,000 / $100,000) and means an average of 20 percent of the portfolio's value is unrealized gain.

  When you sell $10,000 worth of stock, your gain is estimated to be $2,000 (20 percent * $10,000). If your post-retirement tax rate is 10 percent, your taxes on the withdrawal are $200 (10 percent * $2,000). It is usually cheaper to withdraw from taxable investments whenever possible.

• Taxes on other income

  Other income is taxed at the individual tax rate you specify for that other income.

  The taxation of other income differs because other income is added to your other income. It is likely to be taxed at your highest marginal rate. You select the tax rate for each 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 tax rate you select for that income.

  This is because this income is on top of your common income and would therefore be taxed at your highest marginal rate. You 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 cannot be excluded under the IRS rules for exclusion of gains on the sale of a home.

  In the Asset Accounts or Planned Assets dialog, the Lifetime Planner shows you how they calculate the gain you realize on the sale. The Planner taxes the realized gain at the tax rate you specify for that home.

• Taxes on gains from the sale of an asset

  The gain on assets is calculated as sale price minus basis, where basis consists of purchase price + improvements + selling costs - depreciation (if any).

  The Lifetime Planner taxes the gain at the tax rate you specified in the Asset Accounts or Planned Assets dialog.

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  This feature is not available in Canada.