The links below correspond to screens in the software.
Property After Tax
The screen is a very powerful and unique screen that allows you to divide the assets on an after-tax basis.
Having said this, it is important to be aware that there are many assumptions and educated guesses that the software is making.
The results are only as good as the assumptions that go into it.
It is probably most effective to treat this screen as a template, and to feel free to override all of the key rate calculations.
The key rate calculations, which you should feel free to override, include the following:
· Each party’s marginal federal income tax rate in retirement.
· Each party’s state marginal income tax rate in retirement.
· Each party’s current capital gains tax rate.
· For each asset, the percent that will be paid in tax when the asset is sold.
The general approach this screen takes is to calculate the amount that would be paid in tax by each party on each asset if the asset were sold.
The software then subtracts that tax amount from the current value.
The remainder is the after-tax amount.
Simple enough, right? The devil is certainly in the details.
We apply this approach generally to each asset class differently, in a way that we think most accurately represents the way that an asset in that class might be sold.
For real estate assets, if you have specified that the property will be sold, the software uses that actual sale information.
If you have not specified that the property will be sold, we assume that the property will be sold in the current year.
We apply the exclusion, and tax any remainder at each party’s current capital gains tax rate.
For cash and investment assets, if the asset pays dividends, we assume the asset will be sold currently, and we tax the amount which is the difference between the tax basis and the value.
Therefore, for cash and investment assets, it is important to enter the tax basis. You do this on the screen where you entered the asset, on the “more info” screen for the asset.
If the asset pays interest, we assume the asset bond and that there is no gain or loss on the sale.
For debts, we assume that the after-tax value is the same as the current value.
For personal items and vehicles, we assume that there is no gain or loss on the sale, unless you have entered a tax basis for the item.
If you have entered a tax basis for the item, we assume the item is sold currently, and that again is the difference between the value and the basis.
If there is a loss, it is not treated as being deductible.
For IRA and 401(k) assets, we assume that the asset is distributed in retirement.
Thus, the amount paid in tax is the marginal tax rate in retirement multiply by the value currently.
This, we are guessing at the marginal tax rate in retirement.
Feel free to override this entry, which appears at the top of the screen.
We treat defined benefit pensions the same way we treat IRA and 401(k) assets.
We calculate a percent paid in tax for each asset for each party.
Please click the link labeled “Detailed explanations of percent paid in tax” to see these calculations.
It may well be that our guesses and assumptions are wrong in some cases.
In those cases, please feel free to override our percent paid in tax.
Please be careful to note that the percent paid in tax is percent of the total value that will be paid in tax.
You can think of this as an average tax amount.
For Cash & Investment assets, this is not the marginal capital gains tax rate.
An example will illustrate:
Suppose you have a stock that is worth $10,000 and that has a tax basis of $8000.
Suppose that the applicable capital gains tax rate is 15%.
The gain would be $10,000 - $8,000 = $2,000.
The amount paid in tax would be 15% of $2,000 = $300.
The percent paid in tax would be 300/10,000 = 3%.
This is not all the same as the capital gains tax rate of 15%.
But it does help you get at the number you want, which is the value of the asset after taxes are paid.
In this case, that is:
$10,000 – (3% of $10,000)
= 10,000 - $300
There is no equalization payment on the property division on an after-tax basis screen.
This is because it would not be helpful.
Let’s suppose that, on an after-tax basis, the parties were $20,000 apart, so the after-tax equalization payment amount would be $10,000.
You still do not know how much property needs to be transferred to get to an after-tax transfer of $10,000. It depends on how much of each asset will be paid in tax.
In order to reach equalization on an after-tax basis, best thing to do is to use a trial and error method.