Relatively secure retired couple primarily living off taxable accounts Interest & Dividends with goal of minimizing overall taxes. And PRC novice, having some trouble becoming comfortable with setup of the many variables to create an accurate "calibrated" picture of actual as starting point for projections. Wondering how the PRC experienced experts solve this?
My process - After setup of the basic facts (Inflation, Start Balance, Expenses, etc) - Is to [Load Defaults] for Asset Classes (Mode 1), set "Asset Class Definition; Allocation" approximate percentages and then tweak the "Taxation of Assets in Regular Accounts" table percentages until PRC "Tablular Projections -> AGI Detail; Adjusted Gross Income" reasonably matches actual Tax Return data.
Does this approach make sense - Or going about things all wrong with potential to cause other analysis issues?
Thanks!
Bob (PRC 2023 v2.5.1)
@Bo3b Am a relative newb to PRC too having only started last Nov.
My calibration process was similar to yours initially using the default asset allocation and setting all fields for expected returns, appreciation, depreciation, tax rates and inflation to ZERO.
1.Do S1,S2 & S3 match current values. This checks my inputs
2.Are PRC current and future values identical for S1 ,S2 & S3? This checked for odd data being leftover from the as-delivered base case. If they don't match doing a global clear should fix it?
3.Is AGI Detail & Schedule E Income close to 2021 1040 actual?
I poured over the documentation many times flagging things to try or understand. C attached. 😀
@Bob James
The glitch in your procedure is Pralana wants you to break the returns down relative to the average nominal return. You won't find that on your tax return.
I did calibrate non-qualified dividends and qualified dividends from the 1099's I received for the last few years (tax return works too) and divided each of those by the taxable account balance to get each of those as a % of the balance. Meanwhile, you have to make some kind of estimate for stock and bond real returns and provide your asset allocation, so you also have the total real return. You also have to provide your best guess on inflation, so just apportion it from there.
To make it easier to understand, let's say I estimated a 5% real return, 3% inflation, 2% qualified dividends or LTCGs, 1% non-qualified dividends or short term gains and zero non-taxable.
My portion that is taxable as qualified dividends is 25% = 2/(5 + 3).
The portion taxable as ordinary income is 12.5% = 1/(5+3),
The portion taxable as capital gains when sold is the rest, 62.5%
@ricke What sheet/table has the "2% qualified dividends or LTCGs, 1% non-qualified dividends or short term gains and zero non-taxable?"
@bo3b Bob - Have to say I've felt your anxiety. I felt an uneasiness that what I was putting in was "right", and therefore, what I was seeing was "right." It's a challenge to know if you're off-course (you don't know what you don't know, right?). The forum here is a huge help but I sometimes still second guess some of my entries and therefore my plan.
@nc-cpl Sorry to be slow in responding. Not sure I understand your question, so I'll try walk through more fully.
Your 1099s from your financial institutions shows you how much of each type of taxation you have, the terminology Pralana uses is:
Taxed annually as Qualified Dividends or LTCG - things like capital gains distributions from mutual funds, these will be taxed in the current year, but at the preferential Long Term Capital Gains rate.
Simple interest - bank interest, non-qualified dividends (the difference between ordinary dividends and qualified dividends). These will be taxed as ordinary income.
Tax free - municipal bonds
Taxed as LTCG when withdrawn - all returns that weren't distributed to you in one of the categories above, these will only be taxed when the asset is sold (actually Pralana taxes it in the following year to avoid iterative loops, you have to watch for that if there is a sudden change in income and you are trying to manage your AGI for something like ACA or avoiding IRMAA)
You know your account balance, you divide the amounts of each of the above by the average taxable account balance during the year to get the percentage of your account balance that each of these distributions represent.
You have to decide on a real rate of return and have input that on the Financial Assets/Asset classes and allocations. You had to decide on an inflation rate and input that on the Home sheet.
Since everything here relates to the account balance, you just divide the taxation types by the sum of inflation plus real return. So in my example above, I had 2% qualified dividends from my 1099 and a projected nominal return of 8% (5% real + 3% inflation - I wish 2022 had actually given that as a return!), so I enter 25% in Growth Taxed Annually as Qualified Dividends on the Financial Assets - Asset Class Taxation sheet.
@ricke - I follow your logic until the last paragraph. If you have 2% qualified dividends with a projected nominal return of 8%, how do you end up with 25% for Growth Taxed Annually as Qualified Dividends? Why wouldn't it be 2%?
Richard Eaton: Never mind - I see your calculation from your 2/4 post.
