Planner Operations: Taxes
Nancy Gates avatar
Written by Nancy Gates
Updated over a week ago

Are you wondering how taxes are paid and reported in PlannerPlus? Keep reading to learn more....

What is the overarching purpose of the Planner?

This Planner is intended to help you create a long term financial plan, understand the interdependencies among plan elements, and make sound decisions. Each plan is founded on multiple assumptions such as asset rates or return, inflation, and income tax legislation. As a result, the estimated account values, withdrawals, and tax liability will fluctuate.

The taxes section is intended to help you ballpark future tax liability and see interdependencies among decisions, it is not a tax tool that accounts for every scenario and edge case. We highly recommended using a tax specific software or consulting with a tax professional for your current year tax planning.

Calculating and Reporting Tax Liability

PlannerPlus is a forward looking financial projection engine. For this reason, the calculations and projections move forward each month. If we are in April, you will only see information on graphs for May-December for 2022. For 2023 and on, you'll see all 12 months represented on charts.

The Insights > Taxes page has a few exceptions to this general rule.

When you look at the Insights > Taxes page, the Insights > Gross Taxable Income by Source is only reflecting the remaining months in 2022, so May-December. Since we require a full year of work income to accurately model the current year's taxation, we extrapolate backward to fill up prior months based on your average income in the remaining months.

The Insights > Net Taxable Income by Bracket Chart and Insights > Estimated Taxes Chart are showing you information assuming a full year of any monthly income plus the remaining other taxable events found in Gross Income, so that it can give you a rough estimate of your tax liability for a full year. If you had other taxable events in your plan earlier in the current year, those are not reflected since the Planner does not look backwards.

The tax liability provided in the Insights > Tax > Estimated Taxes Chart represents the actual tax liability for the year.

Since we started in January, this is straightforward. We take the total of the last 11 months of income, divide by 11, then multiple by 12. As the year goes on, it becomes a bit less accurate, especially at the end of the year. By November, we only have December left, so we are really just taking December's income and multiplying by 12 for the Insights > Net Taxable Income by Bracket Chart and Insights > Estimated Taxes Chart.

Calculating and Reporting Payment of Estimated Taxes

The Planner funds your expenses, including taxes and reports expense information in the Insights > Estimated Expenses Chart. The Planner computes your taxes based upon sources of income, including withdrawals from savings and investment accounts, which have a variety of tax treatments.

The Planner reconciles the tax liability of the current year in January of the following year. This is what you see on the Insights > Income & Expenses Chart. That is, the tax liability provided in the Insights > Income & Expenses Chart represents the prior year’s estimated tax liability.

You might think of it as if you had no tax withholding or quarterly payments for 2022, and on April 15, 2023 you were required to make a payment to the IRS for the entire tax liability for 2022.

In most years you should be able to match the tax liability from one year's Insights > Tax > Estimated Tax Chart liability projection with the tax liability of next year's Income and Expenses > Estimated Expenses Chart. However, in years where unordinary events occur like if your income drops or increases significantly within a year, you will see more variability in the tax projections the following year.

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