Taxes are tricky :)
OnTrajectory provides a variety of mechanisms and techniques for modeling the effects of taxes over your financial life. However, it's important to always consult a professional when dealing which such complicated and technical subjects, and you should not depend solely on this tool for accurate projections of tax-handling and the effects of taxes when making long-term financial decisions.
Your 'Deposit Account' contains your Effective Tax Rate and is used to tax both income and gains (unless you specify a separate Gains Rate, as discussed in the section Additional Tax Options below).
Your Effective Tax Rate is the actual amount you pay in taxes for a given year and is not truly known until you have calculated taxes/refunds for that year, although you can get a good idea of your typical Effective Tax Rate by looking at past returns.
For example, if you make $40,000 per year, and your employer withholds 25% — but you subsequently receive a
$2,000 refund, here is your Effective Rate:
10,000 (withholding) minus 2,000 (refund) equals 8,000
divide that by 40,000 (salary) and your rate equals 20%
In addition, when you designate contributions that typically occur "pre-tax" (such as those to a 401K or Traditional IRA), OnTrajectory automatically excludes those contributions from taxable Income — meaning you needn't adjust your tax-rate to account for those contributions.
Cost Basis — In some situations, you may want to set the "cost basis" for the Starting Balance of an account. Cost Basis is used to determine the amount of untaxed contributions in an account when it's first defined in OnTrajectory. Typically, this is only significant if you have a large account with sizable prior growth, such as a mutual fund account that's been growing for some time, and for which you have not paid taxes on the growth. This option is only available for accounts with Tax Type "Tax-Annual" and "Tax-Deferred (gains only)". For more information on Tax Types, see the section below.
Again, by default, your 'Deposit Account' is used to centrally define Tax Rates universally for any given year, as shown below:
If you prefer to define Tax Rates for individual Income and Account Items, click Settings. and choose 'Tax Settings' as shown below:
On that tab, you may choose the option 'Use Non-Centralized Tax Rates'.
The tax Type dropdown contains the following options:
The Additional Options section of the Tax window allows you to set two optional fields, Gains Tax Rate and Dividend Yield (if applicable).
Dividend Yield — If entered, this rate is used to calculate the annually-taxable amount of an account on which taxes are paid each year (whether funds are withdrawn from the account or not). An average Dividend Yield is about 3%.
If this value is left blank, all annual gains are taxed as income. If used, however, then growth in the account "above" the Dividend Yield is treated as tax-deferred and taxed only when funds are withdrawn. For example, if Growth is defined 5% and Dividend Yield is 3%, then 2% growth is deferred.
Note: Dividend Yield is only available on accounts with the Tax Type "Tax-Annual". If no value is entered, ALL gains in the account are taxed each year.
From the Taxes tab of your top "Deposit Account", click Enable Automatic Calculation of Tax Rates to have OnTrajectory estimate your tax rates for future years. This determination is made based on an array of factors. Specifically, your Total Taxable Income is calculated for each year. This consists of the following:
If Expenses are higher, we determine if the source needed to fund those expenses is taxable — if so, we add that amount to the "Total Taxable", and proceed as described above.
NOTE: OnTrajectory is NOT Tax-Advising or Tax-Accounting software. Our calculations are based on limited information gleaned from the Income, Expense, and Account items you have entered for future years. Your actual situation may be significantly different based on your unique tax situation.
Further configuration of tax-treatment is available from the Tax Settings tab. This window is reached either by enabling Automatic Tax Calculations, or by selecting Settings from the top toolbar or Menu. The Tax Settings tab is shown below:
Centralized versus Non-Centralized Tax Rates — By default, OnTrajectory maintains "centralized tax rates" meaning, for any given year, the same tax-rates are applied to every Income and Account item. Should you wish to set different rates for different items, you may do so from Tax Settings (although this is NOT typically used).
Automatically Calculate Tax Rates — This option was discussed above and allows tax-rates to be calculated based either on Taxable Income earned or the amount necessary to withdrawal to cover Expenses for a given year. Income Tax rates are interpolated between relevant brackets. For Gains Tax, the bracket amount is used.
Tax Adjustment — This value is can either be positive or negative and is added to the Automatically Calculated Rate. Most often, this is used to represent additional State or Local taxes.
Income and Gains Tax Brackets — These charts are shown on the Tax Settings tab for informational purposes and are updated based on current U.S. Tax Law.