How to Review Income Tax Projections

One of the top questions received by our eMoney Client Support is this: “Why do my client’s taxes look high/low?” Just like in the real world, if your tax projections seem substantially different than what you expect there are a few important areas you should review.

Deductions

Make sure your client’s plan accounts for these common items that create deductions. When entered, the system automatically includes these in the tax calculation when using the default 1040 calculation.

• Mortgage interest – Enter mortgages in the Liabilities area so the system can amortize.
• Charitable gifts – Enter these under Planned Gifts.
• State/local income taxes – Enter these tax rates in the Assumptions area.
• Retirement plan savings – Use the Contributions tab within each retirement plan.
• Existing charitable or capital loss carry-forwards – Enter under Assumptions.

Investment Income

The taxation of investment income is sometimes overlooked. The growth rate applied to a taxable account can be taxed several ways:

• Unrealized long-term capital gains
• Ordinary investment income
• Dividends
• Non-taxable

You can use the Realization tab to define the proper tax handling.

If using a “custom x%” growth rate, rather than a model portfolio rate, the system defaults to 100% ordinary investment income, which can be taxed up to 39.6%. That can create a large tax difference every year if you were expecting the growth to be unrealized capital gains. Note: To make this change as appropriate, utilize the Realization tab.

Tax Basis

Make sure the basis is entered correctly for taxable accounts and property. If basis is left blank, it is assumed to be the same as the market value, which could lead to incorrect capital gains.

Tax Events Ledger

Take advantage of the system’s Tax Events Ledger as a way to view all the relevant tax items in one place.

Select the Ledger report family and use the Tax Events Ledger for any year in question. This report gives you all of the raw tax data the system accumulates and organizes into the income tax reports. This report enables you to see if there is a tax event that is especially high or low or missing.

Download our Advisor Education Guide: Income Tax Projections Seem Wrong to save these tips for future use and search for tax in the eMoney Knowledge Base under Help in the eMoney application for additional resources.

Upcoming Webinar

Join us on February 10 at 2:00 p.m. ET for Your Guide to Tax Planning. In this session, we’ll take an in-depth look at how eMoney handles taxes. We’ll also review how to set up your clients’ taxes accurately in the platform and show which reports you can utilize to verify your work and share with clients.

You can also check out our live training webinars and webinar recordings for tax-related training.