Federal Tax Rates and Calculations
I have questions about issues concerning the tax rates and calculations ESPlanner uses.
1. Am I correct in my understanding that the federal tax rates used for calculation of taxes in 2011 and beyond assume expiration at the end of 2010 of the "Bush tax cuts"?
2. If my understanding is correct, what is the best way to ensure that taxes on capital gains and dividends are calculated by ESPlanner at the new 20% and ordinary income rates respectively effective in 2011 and beyond? It does not appear that the Taxes tab under Ecomomic Assumptions accomodates such rate changes.
3. If my understanding is not correct, when will action be taken to make changes to ESPlanner reflecting expiration of the tax cuts?
4. Do the 2010 and beyond tax calculations reflect changes to the child tax credit, marriage penalty relief, repeal(%) of personal exemptions phase outs and repeal(%)of limitation on itemized deductions which will occur in 2011 absent their extension by enactment of new legislation? If not,will such changes be made and when?
5. Am I correct in my understanding that the AMT exemption amounts ESPlanner uses to calculate the 2010 AMT do not reflect the 2010 exemption amounts enacted for 2010? Is there a pratice regarding the update of ESPlanner to use annually enacted one year changes to AMT exemptions which Congress passes?
Kind regards,
John
RSS
1. No (or at least not in any significant way). We do our tax calculations based on the last published tax forms, in this case 2009.
2. It doesn't. But the capital gains tables have the future published data.
3. Not an issue.
4. No. As said above, they will be made when and if they are actually published in tax publications.
5. We actually did this the last time Congress tweaked the AMT, but only because they did the tweaking retroactively.
Best,
Dick Munroe
Thank you for the prompt response to my 3/13/2010 posting. I agree with the following quote posted by scott@dsneal.com on 3/14/2010 commenting on your response. Scott stated "I believe that taxes are such a big issue that this raises questiosn of credibilty to any of the projections generated by ESPlanner."
I look forward to your response.
Kind regards,
John
I had assumed that, because you are projecting taxes that you would do it based on current law and future law that is currently on the books(i.e. taking into account the expiration of tax code provisions that are already written into the law). Do I hear you correctly that that is not the case? That becomes a serious issue in years like 2009 and 2010, 2011 where there are significant changes already written into the law that will be in effect (potentially for a very long time and with great effect) if Congress does nothing. I have always maintained to clients that nobbody can ever predict what Congress will, or won't, do to change the Code, but that the best projection is one that encompasses the code as written today. That does not mean that the 2009 tax calcualtion will be extended into the future; but it does mean that all current law will be taken into consideration. I believe that taxes are such a big issue that this raises questiosn of credibilty to any of the projections generated by ESPlanner. How do you suggest that we begin to deal with this?
It's a problem called resources. Not enough of them to actually go through 1000s of pages of enabling legislation to figure out how things will play out in the upcoming tax years. Thus the policy of [mostly] implementing tax policy based on real tax forms and calculations. The tax projections are thus based on things that have actually been implemented in policy and stuck to our customers by the IRS, not what we believe will be implemented and stuck to our customers. Projections are exactly that, projections based on implemented tax policy and, like all projections, are subject to error depending on how future tax policy diverges from current tax policy. On the other hand, we'll be more than glad to discuss at length our assumptions on tax policy (indeed, we have done so in earlier discussions, dig through this forum to check them out).
Best,
Dick Munroe
Thanks again for your prompt reply.
ESPlanner’s choice to do projected tax calculations based only on “implemented tax policy” (2010 and prior) results in ESPlanner’s federal tax calculations for 2011 and beyond ignoring tax laws already enacted and scheduled by law for implementation in 2011. Only future action by Congress and the President can alter or stop these scheduled implementations.
One consequence of ESPlanner’s choice is that ESPlanner uses lower income tax rates and more favorable tax calculations for 2011 and beyond(those in effect in 2010) than those scheduled by law to be in effect in 2011. As a result, ESPlanner’s calculation of federal taxes due in 2011 and after results in substantially lower projected taxes for many if not most taxpayers than will be the case if enacted law is implemented as scheduled. Substantially lower projected taxes can have a material impact on consumption and Roth conversion decisions among others.
ESPlanner has the potential to improve the quality of such decisions now by providing a capability to provide federal tax projections for 2011 and beyond that reflect enacted law and allow users to project whether and how implementation would influence consumption, Roth conversion and other decisions. Please commit to such a capability as a priority.
A flexible approach which may be effective would be to perform 2011 and beyond calculations based on enacted law to be implemented in 2011 while allowing the user to specify a separate tax rate for each of ordinary income, dividends and capital gains. The federal tax law changes that have been enacted and are scheduled to be implemented in 2011 are widely and consistently reported by credible sources (see for example http://tax.cchgroup.com/legislation/2011-federal-budget.pdf and The Individual Investor’s Guide to Personal Tax Planning
for Tax Year 2009 appearing in the December 2009 American Association of Individual Investors Journal at http://www.aaii.com/).
Kind regards,
John
Dick, I'm confused by your answer concerning what tax rates ESPLanner used for 2011 and beyond. This answer seems to contradict your answer to a similar question on 21Feb08. Here's that entire post. Please comment.
Thanks,
James Mavrogenis
"From: Dick Munroe
fmbachman at aol.com wrote:I believe that I have read somewhere that the tax calculations are based on current tax law. What does that mean about federal tax rates starting in 2011 when the Bush tax cuts will "sunset" unless the law is changed?
It means that we currently assume that the various breaks go away and we revert to the status quo ante. We have a good example of that in the 2007 "fix" for the AMT which lasts only one tax year and then reverts (Thanks Congress). This is an extreme case, but the Bush tax cuts are more of the same.
Best,
Dick Munroe
2008-02-21 21:14"
No contradiction at all. As I said we MOSTLY don't implement future policy. There were a few notable exceptions (the Bush marriage tax, the one shot AMT change, etc) mostly because they were obvious, simple and well documented by 3rd parties as to how their effect was to be implemented or they had retroactive effect on the current tax year. Independent of future implementation of passed legislation, my earlier statement about resources remains operative. We won't be going through enabling legislation to figure out when, how or if the legislation will be implemented in the future, not enough hours in the day.
Our interface allows you to adjust tax rates and given your research, I would adjust the tax rate upward a bit.
Best,
Dick Munroe
Dick,
I think I understood your response but...
Just so there is no misunderstanding. Is it true, that the tax rates used by ESPlanner assumes the Bush tax cuts continue in 2011 and beyond?
Thanks
James Mavrogenis
Depends on which tax cuts you're talking about. IIRC, the capital gains adjustments that keep happening are correct for the future, but that's pretty much the only thing that is future stuff in the current implementation at this stage and it changes year by year (or about every 2 years on average). The tax rates (brackets and %ages) used are the most recently published ones (from the tax booklets).
Best,
Dick Munroe
Dick, Are these the tax rates (brackets and percentages) coded into the currently released version of ESPlanner?
Tax Rate for 2010: 10%, 15%, 25%, 28%, 33%, 35%
Tax Rate for 2011 and later: 15%, 15%, 28%, 31%, 36%, 39.6%
Sorry for continuing to discuss this topic. But,knowing what assumptions are used in the program's tax calculations is extremely important in understanding ESPlanner's results. With an accurate picture of the assumptions, we can determining what changes we need to make, if any, to the "Economic Assumptions/Taxes" screen.
If you agree, would it be possible to publish the Federal tax assumptions used by ESPlanner? Specifically, tax table data, Capital gains rates, standard deduction values and personal exemption values. A simple spreadsheet would suffice. I would be willing to put together and send you a blank worksheet if that would help. I'm open to any ideas that would give all ESPlanner customers greater confidence in the program's results.
Thanks!!
James Mavrogenis
As I have said several times now, we [generally] don't put FUTURE data into ESPlanner. So [generally] anything targeted for tax year 2010 (payed in 2011) or beyond will NOT be in ESPlanner.
In answer to your specific question, we use the rate tables published in the currently payable tax year's (in this case 2009) tax forms and the numbers you attribute to 2010 are correct FOR TAXES PAYED ON 2009 INCOME. When/if the above tables become published (and the specific meaning of published here is "actually used in tax forms") then we incorporate them into ESPlanner. Until then, we assume that anything Congress passes or puts into the Congressional Record (where most of the tax law actually comes from, its never voted on) is subject to change without notice and we don't waste our time. Had we more resources this decision might change but until then it's pretty well cast in stone.
All the tax data is already published, by the IRS in the current payable tax year forms. We won't publish those separately, you can get them from the IRS web site. That's where we get them from.
In any event, there's a skew between published data and it's incorporation into ESPlanner. Typically the new tax data doesn't show up until the February release of ESPlanner. This year, due to the size of other changes, we didn't have a February release and the new tax data will show up in May [assuming that we make a 1-May release date].
Best,
Dick Munroe
Not that this discussions needs to continue any longer, but Esp's handling of taxes is prudent. You can't implement future tax policy in a planner unless you have actual changes to the tax code. And while 2010 is tricky because of the EGTRRA, bush sunset provisions, it makes sense for ESP to change the tax assumptions when there are actual changes to the tax code. If you have ever taken a income tax class, by the time the text of the tax code is published in one semester, the code and text changes by the next semester. Any planner would have these limitations. The Esplanner team updates the tax assumptions when the code changes. Having been a user for all these years, I think the hallmark of EXP is the handling of taxes which many planners I have seen miss. So you guys give Dick a break.
Kelvin
Kelvin, If I correctly understand your post, you are stating that ESPlanner has incorporated all the tax code/rule/assumptions that are currently written into law. Is that correct?
I don't believe that I suggested ESP incorporates tax law changes that are in the planning stages.
If I think a planned tax change will happen in the future then I will make the appropriate adjustments to my profile assumptions to incorporate my anticipated change. That's the correct way to handle future tax issues.
However, because tax law is extremely complicated it would be very helpful for the ESP team to publish the tax law variables that are currently coded into the program as a starting point for those of us would would like to try different tax scenarios for the future
James Mavrogenis
NO. Published and written into "law" are two different things. When the IRS publishes things in tax forms and you can download them from the IRS site, those go into ESPlanner. Congress passes stuff by vote, Congress puts "technical changes" (no vote) in the the Congressional Record, the IRS Tax court interprets regulations, etc. NONE OF THIS IS OR WILL BE PUT INTO ESPLANNER. ONLY those things published in tax forms are in ESPlanner.
If this isn't clear enough, I really can't do anything more to explain it.
Best,
Dick Munroe