Tax Clarity is designed to bring a coherent view of tax complexities to advisors and their clients. The Tax Map as presented, then, can be interesting to say the least, and it can be helpful to consider a hypothetical case. Assume the inputs from the tax returns and input in Tax Clarity created the following Tax Map and Calculated Details page:
From the output:
- The Green Dot indicates $292,476 of ordinary income is being taxed at 27.80%
- From the details in the Calculated Fields, taxable ordinary income after deductions and exemptions was $284,368 for this Married, Filing Jointly (MFJ) case and is taxed at the 24%, represented by the Red Bar below the green dot. The Net Investment Income of $23,139 boosts these rates based on the interaction between the Net Investment Income Tax and Ordinary income and creates the Gray portion, indicating the Effective Marginal Rate (EMR) of 27.8% at that level of income.
- The Spikes to 100% are related to the income thresholds reached with IRMAA, or Income-Related Monthly Adjustment Amounts, that can impact Medicare Part B & Part D premiums paid. Note these are not taxes, per se, they are thresholds which may created surcharges at those income levels. They are a "be aware" notifications, and they may be removed from the Tax Clarity model based on a simple click in the input screen.
- The landscape layout will allow for adjustments to be made and scenarios to be run to benefit the client. In this instance, for example, the client may want to reduce the IRA distributions taken by the client - shifting the dot to the left - such that Adjusted Gross Income is below $250,000. That would bring the Effective Marginal Rate down to 24%.
- At the lower EFR, one might consider Roth conversions or other harvesting patterns in the current year to take advantage of those levels.