This article is the fifth part of the Cash Flow and Tax Advisor Calculator series. This tool can assist you in determining the effective tax rate for each year within your financial plan. It also includes a worksheet to differentiate between cash flow and tax liabilities. Some clients may have tax-deductible expenses that may lower their effective tax-rate in a given year. The Cash Flow and Tax Advisor makes the process easy to total tax deductible expenses and compare those to the standard deduction and then select either the standard deduction or the itemized expenses.
Only expenses entered in the first five rows under the Expense category are tax deductible if in total they exceed the standard deduction. These itemized deductions are medical expenses, property and state taxes, mortgage interest, charitable contributions, and other Schedule A expenses. These first five lines are in green to indicate that these are the numbers that can change the effective tax rates. The expense titles that are in the yellow box can be edited. The expense titles that are in the green cannot be changed. You may want to use the yellow boxes to define a cash flow budget with your client for expenses that will not be tax deductible in addition to the first five rows in green under Expenses that may be tax deductible. In this how-to article, we will show step by step instructions and hypothetical examples demonstrating how to enter expenses that exceed the standard deduction and, consequently, lower the effective tax rate.
To learn more about the Cash Flow and Tax Advisor menu see articles:
To learn more about the Cash Flow and Tax Advisor individual column features see articles:
- Hide/Unhide Feature for Individual Tax Columns
- Permanent Deletion for Individual Tax Columns
- Downloading a 1040 Sample Tax Form
To learn more about forecasting effective tax rates see articles:
- Part One: Forecasting Effective Tax Rates While the Client is working
- Part Two: Forecasting Effective Tax Rates While the Client is in retirement and before Social Security Disbursements
- Part Three: Forecasting Effective Tax Rates While the Client is in Retirement and Social Security Starts Up
- Part Four: Forecasting Effective Tax Rates in Retirement: RMDs, Social Security, and Roth Withdrawals
- Part Five: Adding Expenses into the Cash Flow and Tax Advisor Calculator
Step 1: Income Amounts: Take note of the income amount for the particular year you would like to add the expenses to. 
Step 2: Cash Flow and Tax Advisor: Click on the Cash Flow and Tax Advisor button underneath the Client’s name heading.
Step 3: Edit: Click on the green Edit button underneath the Cashflow and Tax Advisor heading.
Step 4: Add Scenario: Click on the green add scenario button underneath the Cash Flow and Tax Advisor heading.
Step 5: Left Arrows: Click on the left arrows to move the new scenario three columns over.
Step 6: Tax Filing Year: Click on the dropdown and select which tax year you would like to use. SIPS has the ability to create hypothetical returns for past and future years. 
Step 7: Scenario Title: Enter in a new title for the scenario. 
Step 8: Wages: Enter in the total income into the wages cash flow and tax return columns.
Step 9: Client 1 Distributions: Delete the numbers in the Client 1 Distributions.
Step 10: Client1 Security: Delete the numbers in the Client1 Social Security.
Step 11: Standard Deduction: Scroll down and take note of what the standard deduction is for the previous year. The hypothetical schedule A amounts will be higher than this amount. 
Step 12: Medical Expenses: Enter in the medical expenses. Only expenses greater than 7.5% of taxable income are considered tax deductible. You can let SIPS do the math for you and just enter the total medical expense in the cashflow column and SIPS will automatically calculate how much of those expenses could be tax deductible. 
Step 13: Property & State Taxes: Enter the total amount you paid in property and state taxes. Current tax law limits the deductible amount for these taxes to $10,000. Therefore, even if your total property and state tax payments exceed $10,000, only $10,000 will be used in the tax calculation. The calculator will automatically apply this limit. 
Step 14: Mortgage Interest: Enter in the mortgage interest amount. 
Step 15: Charities: Enter in the charities amount. 
Step 16: All Other Schedule A: Enter in all other Schedule A amounts. 
Step 17: All Other expenses: Enter in All Other Expenses. These are the expenses where the titles can be edited and this is the part that of the worksheet that does not affect the efffective tax rate. 
Step 18: Calculate: Click on the green calculate button underneath the Cashflow and Tax Advisor heading.
Step 19: Expenses: Take note that SIPS has put in the 7.5% medical expenses and the 10,000 for property and state taxes.
Step 20: Tax Bracket: Scroll down the page and take note of the marginal tax bracket and effective tax-rate "Eff Tax rate." Take note of the difference of the tax rates between Working and Working & Expenses.
Step 21: Save: Click on the green Save button underneath the Cashflow and Tax Advisor heading.
Step 22: Structured Income Planning: Click on the Structured Income Planning button underneath the Client’s name heading.
Step 23: Edit: Click on the green Edit button underneath the Structured Income Planning heading.
Step 24: Add Inc Tax: Click on the green Add Inc Tax button underneath the Structured Income Planning heading.
Step 25: Add Adjustment Text Box: Enter in the effective tax rate. 
Step 26: Tax Adjustment Check Boxes: Click on the box that the effective tax rate will change. 
Step 27: Pick Years: Click on the green Pick Year(s) button.
Step 28: Tax Adjustment Table: The new effective tax rate will automatically be entered into the Tax Adjustment Table.
Step 29: Save: Click on the green Save button underneath the Manage Tax heading.
Step 30: Income Tax Column: The new effective tax rate will automatically be changed in the Income Tax Column. 
Step 31: Save: Click on the green save button underneath the Structured Income Planning heading.
If you feel you need more support or would like to set up demo time with one of our representatives, please contact us at: +1-888-449-6917 or support@planscout.com.
