# Did You Know...

### Family Law Software can calculate child support guideline amounts in 21 states.

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 Question: How do liquidations work in the software? Answer: Whenever there is net cash outflow in a given year, the software automatically liquidates assets to cover the cash outflow. This topic will cover how the calculations work and how to track them through the software. How the Calculations Work When assets are liquidated, tax has to be paid. The way the software accounts for this is to liquidate additional securities in order to pay the tax. This tax shows up as additional liquidation, and does not appear as part of the After-Tax Cash Flow. You may wonder why this is. It is to avoid circular reasoning. The shortfall in net income is calculated by finding how much income falls short of expenses and taxes. So taxes are used in that calculation. We then liquidate assets to cover the shortfall, and pay additional taxes on the liquidation sales. If those latter taxes were included in the initial tax number, we would have a circular calculation. For this reason, when there are liquidations, the tax number shown on the View/Edit Taxes report will be the initial tax number, but it will not include the taxes on the liquidation sales. As will be described in more detail below, you can find the liquidation tax amounts and calculations on the liquidations reports. These are: at the asset-class level, Liquidations to Cover Negative Cash Flow, and, for asset-by-asset detail, Financial Investment Liquidation and IRA/401(k) Liquidation. The software proceeds to liquidate and pay incremental tax, security by security, until the cash flow deficit (negative After-Tax Cash) is covered. The software liquidates securities in the sequence in which they are listed. You may change this sequence on the screen where you enter the Cash & Investments. If no tax basis has been entered for a security that is being liquidated, then that software will calculate the gain to be the full value and will apply the capital gain tax rate to the full value. This may result in a larger tax bill then will in reality be the case, but in the absence of the entry of tax basis, it is the best we can do. If there is a loss on the security, no tax will be paid upon the liquidation. The software ensures that no more than \$3,000 of net capital loss is generated in any given year. (If more than \$3,000 of net capital loss is accrued, the software currently is not tracking capital loss carry forward. You may enter the benefit of the capital loss carry forward simply as a non-taxable "Wage-Like Income" item in that year that you'd expect the carryforward would be able to offset taxes. You would calculate the amount of this item by multiplying the amount of the carryforward to be claimed times the capital gains tax rate in the relevant year.) If there are not enough securities to cover the cash flow deficit, the software next liquidates retirement accounts (IRAs and 401(k)s). Upon this liquidation, we apply ordinary income tax rates plus the 10% penalty if appropriate. Tracking This Through the Software Whenever there is negative cash flow, you want to look to the liquidation reports in order to follow the numbers through. You can see the liquidations on the report entitled "Liquidations to Cover Negative Cash Flow." To see the liquidations of cash and invesments on a security by security basis, look at the report entitled "Financial Investment Liquidation." To see liquidations of retirement accounts on an account by account basis, look at the report entitled "IRA/401(k) Liquidation." You can also look at the "Accumulated Savings" report, which shows the amount of investment assets and retirement assets that are needed to cover the cash outflows (including the down payment). Two additional reports that complete the reporting are the "Investment Assets" and "IRA/401(k) Assets" reports. These reports show value of the assets at the beginning of the year, growth of the assets during the year, liquidations of the assets (from the liquidations reports), and then balance of the assets at the end of the year. In terms of a flow of presentation, you can look first at the After-Tax Cash Flow reports, to see if there is negative net cash flow. Then, look at the liquidation reports, in order to see the amount of securities and retirement assets that had to be liquidated to cover the deficit plus incremental tax. Finally, look at the asset reports for investments and IRA/401(k), in order to see the impact of these liquidations on the net balance of investment and retirement assets.