It’s Tax Time!

OnTrajectory can help you both more accurately estimate your future taxes as well as help you minimize the taxes you’ll pay in the future. We do this in 3 different ways.

1. Automatically Calculate Taxes

Tax rates are defined within your Default Account (the top account in your account list), and you can define different tax rates for different periods of your life using age ranges. For example, one rate during your earning years and another for your retirement years. The simplest way is to manually set your Effective Tax Rate across the board, or you can enable “Automatic Tax Calculations”. 

When you enable your taxes to be calculated automatically, we look at all the following variables for each year in your model:

  • All Income Items for the year
  • Required Minimum Distributions (RMDs)
  • Drawdown Withdrawals
  • Defined Taxable Withdrawals (negative contributions)
  • Annually Taxable Gains
  • Conversions to a Roth Account

If Total Taxable Income is greater than Expenses for the year, we subtract the standard deduction (either single or married) and determine the tax rate based on U.S. Federal Marginal Rates and any Tax Adjustment you may have defined.

If Expenses are higher, we determine if the source needed to fund those expenses is taxable — if so, we add that amount to the Total Taxable, and proceed as described above.

Because we don’t know which state you may live in, or if there are other local taxes or deductions applicable to your situation, the “Income Tax Adjustment” field allows you to add or subtract from the calculated rate, as shown below:

2. Optimize Future Taxes Owed

The order in which funds are withdrawn from your accounts can have large consequences on the amount of taxes you pay, and ultimately on how long your money lasts.

When cashflow is not sufficient to meet your Expenses or defined Account Contributions, OnTrajectory automatically draws funds to meet those needs. The first option is to “Draw from ‘Default Account’ First” — when checked, OnTrajectory will fully deplete your Default Account before considering the general preferences outlined below:

In most, but not all, cases this order yields the least tax-burden. OnTrajectory, however, allows you to easily experiment with different orders either manually by changing the order, or automatically by clicking the Auto-Optimize button. To see the actual withdrawals planned, open Output Data and go to the Drawdowns tab.

3. Fine-Tune Tax Estimates

By default, certain account types such as a Brokerage Account are set to the tax-type “Tax-Deferred / Gains-Only”. This means that taxes on growth are deferred until you actually remove funds from the account. In reality, many accounts will produce a Dividend Yield (taxed at your Income Rate) each year, and then only the remaining gains are taxed. 

This option is only available when you set the tax-type of the account to “Tax Annual”. If entered, this rate determines the portion of gains that are taxed annually at the Effective (Income) Tax Rate. For example, if an account’s growth rate is set at 5% and the Dividend Yield is set at 2%, then 2% will be taxed each year. The remaining 3% (the remaining gains) will only be taxed when funds are pulled from the account.

DISCLAIMER: OnTrajectory is NOT Tax-Advising or Tax-Accounting software. Estimations are for informational and educational purposes only. Our calculations are based on limited information gleaned from the Income, Expense, and Account items you have entered for future years. Your actual situation may be significantly different based on your unique tax situation.

HELPFUL HINT: Always compare OnTrajectory’s calculated results to YOUR ACTUAL TAX RETURNS to ensure estimates are in the proper range.

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