This report is actually several reports combined into one.
Lines 1 - 6: Taxable Income: This section includes every item that increases taxable income with the taxable gross.
Lines 7 - 20: Income Taxes: This section includes every item that will decrease taxable income, including adjustments, deductions, exemptions, and credits. It displays Table Tax and AMT and shows the dollar figure in preference items before AMT kicks in.
Lines 21 - 28: Cash Flow: In Line 21, MasterPlan totals every item that increases cash flow. Lines 22 - 27 display the totals of all the taxes, expenses, payments, and investments. Line 28 displays the difference. Notice that MasterPlan calculates the FICA and Medicare taxes in this section.
Lines 29 - 31: Liquidity: How much cash do your clients have; in other words, how liquid is their situation? Line 29 displays the running total of the annual surplus cash or shortage.
Lines 32 - 33: Retirement Plans: This section illustrates how they are doing in terms of retirement.
Lines 34 - 35: Net Worth: This section displays every item that increases or decreases Net Worth and then discounts the Net Worth by inflation.
Although most of the report is self-explanatory, we are including some detailed descriptions of some lines to help you fully appreciate the diagnostic qualities of MasterPlan.
Notice that the amount displayed on this line is the total of the detail lines right below it. This is true of most of the lines on this report, with a couple of exceptions, such as Line 2. MasterPlan distinguishes between salaried and self-employment income because the FICA rates are different.
When your client retires, this line includes any social security income and other retirement plan income from the payouts that you have defined.
MasterPlan will display the Social Security Benefit and also display a line titled, "Taxable Social Security," if appropriate. MasterPlan knows that up to 85% of the benefit might be taxable, depending on the rest of the clients' situation (such as Muni Bonds).
If the Social Security Benefit is not taxable for this client, MasterPlan will not display the taxable benefit line and will not include the benefit in the total; if the benefit is taxable, MasterPlan will include the taxable amount (and not the total benefit amount) in the total for Line 2.
MasterPlan will display the calculated benefit (according to the Social Security Eligibility on the Client window) or the benefit that you entered on the Tax and Cash Flow Form. If you see both displayed, then you should return to one of those windows and correct the figures so that the benefit is not overstated.
If the client is not reinvesting in retirement assets, you will see a line entitled: System Retirement-Client or System Retirement-Second Client.
We have added the lines for short-, mid-, and long-term capital gains here as a result of the 1997 tax legislation. Next to each asset, you will see the letter L, M, or S to identify the type of capital gain. If you prefer not to see the letters on the reports, you can use the Find and Replace function in Word to remove them.
This line will display the total of all your client's passive income for the year. This number is important since all passive losses will offset against this figure.
This line will contain all adjustments such as qualified IRA contributions, 401(k), and other tax-qualified plan contributions. In the case of an IRA, the amount that appears is the CALCULATED deductible contribution. MasterPlan determines the deductibility by first checking to see if your client has any qualified retirement plans. It then checks your client's filing status and Adjusted Gross Income to arrive at the deductible portion of the contribution, if any.
If the client has an asset tagged as a Keogh, and even if he is not contributing to it, MasterPlan will disallow any IRA contributions.
These are losses that can only be used against Ordinary (Active) Income. MasterPlan automatically nets ordinary income and losses. This line displays the amount that is usable.
These are losses that can only be used against Capital Gain Income. MasterPlan automatically nets capital gains and losses. This line displays the amount that is usable.
We have added the lines for short-, mid-, and long-term capital losses here as a result of the 1997 tax legislation. Next to each asset, you will see the letter L, M, or S to identify the type of capital gain. If you prefer not to see the letters on the reports, you can use the Find and Replace function in Word to remove them.
The passive income and loss rules in the 1986 Tax Act are perhaps the most difficult to understand portion of the new law. In brief, MasterPlan first determines the acquisition date of passive activity investments to see if the phase-out rules apply. If they do, losses are phased out according to the schedule. If they do not, the losses are applied against passive income only.
In the case of actively managed rental property, the losses are calculated and then applied to the loss-and-income test to see if any of the losses can be used against Ordinary (Active) Income. This line will display the passive losses that are usable each year. Any losses not usable due to the client's AGI being too high are considered regular passive losses subject to the phase-out limitations (if the property were acquired before 10/22/86). Otherwise, they become Suspended Passive Losses and are carried forward.
This line displays the total amount of itemized deductions that can be taken. Any deductions that appear here have already passed either the 7.5% medical deduction test or the 2% of AGI miscellaneous itemized deduction test.
The report can print detail lines for Itemized Deductions and also one labeled "Std Deduct Less Item Ded" because not all deductions are usable. For example, Medical Expenses must be 7½ of AGI to be allowed. Certain deductions are also subject to a 2% floor of AGI. And certain deductions are 100% usable. It used to be that your itemized deductions were 100% offset against what otherwise would be taxable income, but that is no longer true. Now MasterPlan looks at all the deductions and then determines of those deductions how much of it is usable. The term Usable Itemized Deductions is the calculated amount of the deductions that are usable. MasterPlan then takes that and compares it to the Standard Deduction.
The state tax can add to the Standard Deduction to make the Usable Itemized Deductions, since state tax is an itemized deduction. This line also includes tax-deductible interest expense.
The Investment Model and Tax Form state tax credits net out, but are not shown as individual line detail at this time.
The exemption amount is the number of exemptions times the exemption amount (around $2,150). If any part of the exemptions have been disallowed, MasterPlan just shows the amount allowed.
MasterPlan takes either the table tax or the AMT, applying the appropriate credits. The amount on the top line on the detail audit report is the tax you owe after the credits. If the credits offset the Table Tax and bring it down to 0, then MasterPlan takes the AMT. So the Table Tax is tax BEFORE any applicable tax credits.
The tax rate is the percentage of your income that goes to tax, such as 21%. But the tax bracket is the combined state and federal rates. It is not additive, since state tax is an allowable itemized deduction for federal purposes. In other words, if the client paid a 3% state tax rate and a 15% federal tax rate, he would pay about 17.55% in taxes on the next dollar earned. MasterPlan estimates this rate, even if the client did not have to pay taxes this year.
On this line MasterPlan has calculated the additional preference amount needed to cause the AMT to exceed the table tax. This line can be a very helpful guide during the planning process. It will enable you to optimize your tax strategies so your client can make the best use of his deductions and investments.
Think of taxes as an inverted Bell curve. Taxes can never reach 0 as a result of having preference items. You can reduce a client's taxes only to a certain point, at which time the AMT begins to kick in. Even though the table tax can go to 0, the AMT tax now kicks in. So the taxes go down and down and down, and then they reach a null point. And then they begin to climb back up again because of AMT.
So, when you are planning for a client, if the client is capable of investing in such a way to reduce taxes, then that line suggests how much more in preference items you can take before the Alternative Minimum Tax will cross over. Bear in mind that is very much a moving target and not an absolute, hard number. In fact, there is no way to come up with an absolute, hard number. The more preference items you take, the deeper you close in on AMTs.
For example, if the number says $29,800, and you give the guy $29,800, you might find out that is too much. So you might have to adjust it. This line is a rough guess, but it gives you a guideline.
Retirement assets are listed here ONLY if they are providing cash flow for one or more years on the report. In the Proposed Overview: If you sell an asset which secures a mortgage liability, the gross proceeds from the sale go here in Cash Flow. The pay-off (from the what-if sale) of the loan goes in Line 26 (Loan, Prop & Other).
If the client or spouse has retired, it might include payouts from the System Retirement Money Market Account.
There are only two ways a number can appear on this line: first, if you have previously run an Education Need Analysis for your client and there is a need to fund college costs out of cash flow; second, if you have explicitly entered a number for extraordinary living expenses in the Cash Flow or Budgeting Worksheet. These types of entries might include unusual taxes due, one-time expenses or other unusual but predictable cash expenses.
This line contains mortgage payments, loan payments, insurance premiums, property taxes, and other items which are contained in the client's asset database.
This area may also include a line labeled, "Untracked Living Expenses." This line appears if you checked the Zero Surplus Cash checkbox on the EditClient | Projection Assumptions Tab. If you did not check this box, then MasterPlan shows any surplus cash in Line 28.
Generally, this line is self-explanatory. However, if your client has savings or investment accounts where he is reinvesting the interest or dividends, these amounts will also show up on this line.
This is the annual "bottom line". If this number is positive, it means your client is spending less than he is making. If it's negative, he's spending more than he's making. Any amounts that appear on this line are added (or subtracted in the case of negative numbers) from the system money market account on Line 30.
The system money market fund is the temporary account MasterPlan establishes to retain the total of all your client's Annual Free Cash. The interest rate paid on this account along with its taxability is set up in the Projection Assumptions Tab. Interest on this account is compounded annually and credited in the following year.
MasterPlan takes the most conservative approach. Assuming the client has $10,000 of Annual Surplus Cash, for example, MasterPlan displays the $10,000 as of December 31st as Annual Free Cash (Line 28) and as part of Apparent Net Worth (Line 34) in a detail line called Accumulated Surplus Cash. It does not apply an interest the first year of the projection, since it does not know at what point the balance reached $10,000. In Year 2 it applies the Money Market Interest Rate from the Global Assumption window to the prior year's Accumulated Surplus Cash. If this is 5%, then the client starts the year with $10,000 plus $500 of interest. Then MasterPlan adds Year 2's Annual Surplus Cash, to get the Accumulated Surplus Cash amount for Year 2. In Year 3, it calculates the interest on Year 2's balance, etc. Using this method, it might look as if the client has less money than he actually might have, but at least he can plan to have enough.
This line contains the total of all of your client's checking, savings, and money market accounts (it does NOT include CD's). Together with the system money market fund on Line 30, these items represent your client's liquidity each year.
This line displays the aggregate balance of all your client's retirement plans. These balances include the annual earnings on each of the accounts as well as any additions to the accounts.
This line is simply the total value of all your client's assets minus all his liabilities.
If the client has a retirement plan from work that says it is going to pay you $50,000 a year of income at retirement, MasterPlan does not show the present value today for that future income stream. You don't put that on your balance sheet, so MasterPlan does not include it there.
This line discounts your client's future net worth by the inflation factor you entered in the Assumptions screen. Its principal value comes in relating future values (which can appear unbelievably high) to the client's present experience. It also has another important application. Even though the client's nominal net worth may be increasing over the years, if his mix of investments is too conservative, he may experience a decrease in net worth in real terms.
While doing a projection, MasterPlan will determine whether your client will experience an annual cash flow shortage in a particular year (if total expenses for that year exceed total income PLUS whatever has been accumulated in the System Money Market account to that date). MasterPlan will use all of the cash accumulated in the System Money Market account in order to cover the shortage of cash flow.
If the client is not reinvesting growth back into their retirement assets, MasterPlan cannot mingle this growth with that of non-retirement assets. It keeps these monies in the System Retirement Money Market Account and creates this entry on the Balance Sheet and also on the Financial Overviews. MasterPlan calculates this growth from the following fields: Per Share Value, Percent Appreciation, Dollar Return, and Percent Increase. Growth from retirement assets has to be kept separately within the confines of the pension plan because it is not paid to the client directly.
To roll these funds over into another retirement asset, you must sell the System Retirement Money Market Account from the What-If Sell Menu.
In earlier versions, MasterPlan (to avoid a tax penalty) always withheld the appropriate percentage of the prior year's tax to avoid the penalty. So, if there was a year with a big bump in income, or a big capital gain, or something large, the taxes spiked up for that year. The year following the spike, MasterPlan withheld at that same rate as for the previous year. It displayed the amount that was withheld but was greater than that's year's taxes as Excess Withholding. The next year it displayed a Tax Refund. As a planner, you could adjust these figures, if desired, on the Tax and Cash Flow Form. In the current version, we have removed this feature due to customer request.
It is possible for a client to owe an AMT tax amount, even if there were no preference items. For example, if the client is single that might happen. Or, even if there are no preferences, it takes certain amounts and types of income. For example, municipal bond interest can be subject to AMT.
The value of a client's business does not automatically show up as part of net worth. You must run the Business Valuation Report on the business after assigning an earnings and weight for at least one year. If you don't want to run that report, you may manually enter a number into the Average Value field on the asset form.