eMoney Tip of the Week: Income Tax Report vs. Cash Flow Report

For many advisors, both the Cash Flow and Income Tax reports are instrumental in delivering client plans and presentations. And while these reports can be used together to offer a well-rounded view of a client’s financial picture projected forward, understanding their differences can help advisors provide a more comprehensive approach to each clients’ financial plan.

Cash Flow Report

The Cash Flow report lists all income, investments, savings, taxes, and expenses, illustrating the effect these variables have on a client’s portfolio on an annual basis.

Within the Cash Flow report, the Investment Income column reports the sum of all distributed income from taxable investment assets. For taxable assets, Investment Income includes the percentage of Income distributed from dividends, ordinary, and non-taxable income as defined by the Realization Model.  Within any Taxable Investment, there is a Realization tab that allows you to specify the exact taxation to be applied to the annual growth of that account, per the growth rate specified in the Basic tab.

And often overlooked, is the ability to specify the percentage of pre- or post-retirement growth to be distributed annually from the Taxable Investment into their client’s Core Cash account. The Investment Income column within the Cash Flow report will only populate if an Income Distribution percentage is entered and saved. If no Income Distribution is specified, the Investment Income column will show $0 for any projected years.

Income Tax Report

The Income Tax report demonstrates how a client’s wealth will be taxed on an annual basis and projects the client’s future Federal, Capital Gains, Qualified Dividends, and Other Income taxes.

Within the Income Tax report, the Investment Income column (under Gross Total Income) acts differently than in the Cash Flow report. Here, it measures the amount of investment income subject to Ordinary Income Tax rates. Investment income and short-term capital gains are specified via the Realization Model within the Taxable Investment in Advanced Facts. Short-term gains are determined by multiplying the capital gains amount by the percentage of the account which is turned over annually. For Qualified and Deferred Compensation Assets, all distributions are included. The taxable portion of Fixed Annuity payments is also included, as well as any taxable interest earned on Cash Assets. Real Estate Income net of any Real Estate Expenses will also be included.

As a helpful reminder, you may hover your mouse over the blue title of any column in the Cash Flow or Income Tax reports for an ‘intelli-tip’ to find a definition of what that column entails.