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1040 Calculation Screen |
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1040 Calculation Screen |
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1040 Calculation Screen
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1040 Calculation Screen |
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1040 Calculation Screen |
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The 1040 Calculation screen presents the paycheck information (showing the current paycheck and one other scenario) and federal 1040 calculation (showing the current 1040 return and another scenario associated with the alternative paycheck scenario).
| Note: | Having the client's prior year 1040 tax return will help in the accuracy of calculating this year's federal values. Also, asking the client if they expect to have any significant changes in their taxes this year will provide a more accurate calculation. |
Paycheck Data
The paycheck information on the left is similar to what is shown in the opening paycheck calculator, and only the difference (initial Scenario prompt) will be discussed.
Scenario
This allows for selecting which paycheck to illustrate the effects of. There are five options for selecting:
| 1. | Quick Max |
| 2. | Proposed #1 |
| 3. | Proposed #2 |
| 4. | Whole Year |
| 5. | Partial Year |
The first three items (Quick Max, Proposed #1, and Proposed #2) are the same paycheck calculations from the front screen.
The last two items (Whole Year and Partial Year) automatically illustrate the factoring of the client's refund over the whole year, or partial year, by increasing the number of allowances. (In the example above, the federal and state allowances were increased from 0 to 9.) The increase in pay is automatically deposited to their qualified plan.
| Note: | The initial Take Home Pay calculated for the Proposed #1 and Proposed #2 paychecks will be taken from the active paycheck when the 1040 data input screen was opened. |
Whole Year and Partial Year
The Whole Year scenario factors the refund to the qualified plan over the whole year. If the changes to the paycheck are not early in the year, and year-to-date information was entered, TRAK also calculates what the allowances may be changed to for the remainder of the year (Partial Year). Partial Year is a more aggressive approach.
| Warning: | If a client elects to use a more aggressive Partial Year election, they will need to change their W-4 filing at the end of the current calendar year. Otherwise, they may have a severe tax bill due at the end of the following year. |
Because of the problems that could be created when working with the Partial Year election, the following steps are strongly recommended:
| 1. | Have the client fill out a salary reduction agreement and a new W-4 to increase the number of withholding allowances to the Partial Year values. Send this to the payroll department. |
| 2. | Also, have the client fill out a salary reduction agreement and W-4 that goes into effect January 1st of the following tax year, reducing the qualified plan contribution to the Whole Year recommended values. |
| 3. | Set up a file for the forms to be mailed in January. |
| 4. | Depending on the cutoff date for payroll, send the January forms (salary reduction agreement and new W-4) to the payroll office to be processed. |
| 5. | Send a letter to the client, along with a business reply envelope, asking them to check the first paycheck in January to confirm that the payroll office correctly processed the paperwork. Request that a copy of the paycheck stub be sent to you. |
| 6. | If you do not receive a copy of the paycheck stub by the next payroll cycle, call the client to confirm that the change has taken place. |
1040 Calculations
The 1040 Calculations show a detailed breakdown of the current and proposed 1040 federal calculations. The Current column should be similar to the client's current situation.
The up/down arrow button to the right of the proposed refund allow for increasing or decreasing the federal refund. This works by adjusting the federal (and state) allowances, and adjusting the qualified plan (401(k), 403(b), etc.), so that there is no change in take home pay.
1040 Brackets
The 1040 Brackets provide an overview as well as detailed information about the client's federal 1040 bracket. Thus leading the client to a quick, understanding of their tax bracket, and how contributions affect their marginal tax bracket.
In the example shown above, the client's increased contribution to the qualified plan moved their marginal tax bracket from 25% to 15%. If they have a Roth account available, they may want to consider:
| 1. | Reducing their qualified plan contribution so that they are not so far below the 25% tax bracket; and, |
| 2. | Making additional contributions to a Roth account. |
This is because the the marginal tax bracket has been reduced by 40% (excluding any state or local taxation). This Roth money then could possibly be taken out in retirement, avoiding a higher tax bracket.
How much should the client decrease their qualified plan contribution?
In this situation, the client has $42,560 taxed at 15%. That value could be increased to $48,050. The difference between the two is $5,490. Dividing it by the number of pay periods results in a $457.50 decrease to the pre-tax qualified plan contribution. This money should be added to the client's Roth account contribution.