Shouldn’t equal special taxable receipt and excludable expenditure net to $0 AGI?
Shouldn’t equal special taxable receipt and excludable expenditure net to $0 AGI?
I did the following:
Created a new profile.
Added a special receipt of $100,000 in today's dollars for 2010 taxable at ordinary rates.
Added a special expenditure of $100,000 in today's dollars for 2010 excluded from AGI.
Created reports.
The “Federal Taxes - Single Filer” report shows AGI as $2,912. Shouldn’t it be $0?
As a test I used TurboTax 2008 and entered $100,000 alimony income (1040 line 11) and $100,000 alimony expense (1040 line 31a). TurboTax computed AGI as $0. This question is not specifically about alimony. Alimony was just a convenient income and expense type to enter special receipts/expenditures under.
RSS
Nope. You're forgetting the income on the 100K. The $2912 is one years real income on an account with 6% nominal interest and 3% inflation. Exactly what ESPlanner's defaults are.
This is one of the subtle and not particularly easy to explain aspects of ESPlanner (I just got really comfortable thinking about this myself in the last 12 months or so). The $ inputs for ESPlanner are generally "beginning of period" assets (with the principle exception of special expenditures). The $ outputs from ESPlanner are all "end of period" assets.
What's the difference?
Typically contributions and interest. So you entered a 100K special receipt in BOP assets. This immediately got dumped into your nominal assets (savings) and grown by your nominal interest rate (6%). You entered a $100K expenditure in EOP assets for your spending. The difference between the two is the real interest accumulated.
Clearly TurboTax doesn't differentiate between beginning and end of period assets since it actually isn't doing any interest or inflation calculations. If you could control the timing of the special receipt and made the receipt and expenditure happen at the same time, you would get 0 for AGI.
Best,
Dick Munroe
OK, I thought I understood your logic in the calculation above but then I tried to apply it in ESPlanner. I tried to enter a taxable Special Receipt for a given year, have it earn the Taxable Return for the year, and offset the receipt and it’s income exactly with a Special Expenditure excluded from AGI at the end of year.
If I make the entries in Dollar’s, instead of Today’s Dollars, I believe you don’t need to include Inflation in the calculation. So shouldn’t the calculation for any year be:
Special Receipt = Special Expenditure/(1+Nomial Rate of Return on Regular assets)
I believe that would mean the Special Receipt will have grow by exactly (1+Nomial Rate of Return on Regular assets) in nominal dollar terms by year-end and so equal the Special Expenditure. And since they exactly cancel, there is no AGI and no Savings accumulated to earn income in future years.
For a specific example, using $1,000,000 as the Special Expenditure in nominal dollars and 6% as ESPlanner’s default Nominal Rate of Return on Regular assets shouldn’t the Special Receipt be $943,396 in nominal dollars?
Starting with a new profile, if I enter a Special Receipt of $943,396 in nominal Dollars taxable at ordinary rates repeated for 10 years starting 2010 and a Special Expenditure of $1,000,000 in nominal Dollars excluded for AGI for 10 years starting in 2010 ESPlanner outputs the values below on the “Federal Taxes - Single Filer” report.
Year Adj Gross Inc
2010 0
2011 0
2012 753
2013 25,856
2014 48,785
2015 69,687
2016 88,699
2017 105,948
2018 121,559
2019 135,639
But based on my logic above I believe AGI should be $0 in all 10 years. Please help me with what I’m missing.
Thanks
Hi Carl, We'll look into this as soon as Dick gets back from a trip he's on. Call me at the end of the week at 617 834-2148. best, Larry