So, I am trying to figure out where the above "Ordinary taxable income before R/C" comes from. I am adding up my Taxable Wages, Interest, and Ordinary Dividends from the tax form and they do not equal this number. Can you help me understand how Pralana calculates this number? Reason I ask is, it looks like I have more headroom to the top of the 24% bracket than I believe I actually do. Somehow, I don't see how this "Ordinary taxable income before R/C" is being calculated.
Thanks much!!
Hi, good question.
Short answer:
"Ordinary taxable income before R/C" is your 1040 Line 15 Taxable Income minus qualified dividends and capital gains. Taxable Income is AGI minus the standard or itemized deduction and possibly a few other adjustments on the 1040 between lines 11 and 15. You need to start with taxable income, not AGI.
Long answer:
Pralana determines the R/C amounts by calculating your taxes without any conversion, determines the 'headroom' available up to the top of your available bracket, sets the R/C amount, and then recalculates your taxes and re-checks the headroom. It does this iteratively up to 30 iterations (per year) because taxes do not have a linear relationship with income.
If the Metric MRI shows $X as your "Ordinary taxable income before R/C", you should be able to see this if you disable Roth Conversions (at top of the page), then go to:
Review > Taxes > Summary and look at the column "Ordinary Taxable Income" which should show $X. That section, "Federal Ordinary Income Marginal Bracket" also shows the headroom in your current marginal bracket.
To see how $X is calculated, it depends on which tax form is use to calc your taxes. There are up to 3 different forms which may be used to calculate tax due. See Schedule D line 30 which shows the Federal tax calculation method.
Usually it is the Form 1040 Qualified Dividends and Capital Gains Worksheet. As shown on that form, line 5 is your 1040 line 15 Taxable Income minus qualified dividends and capital gains.
Look at the Form 1040 to see how line 15, Taxable Income is calculated. Note that line 15 Taxable Income is your line 11 AGI adjusted for the standard or itemized deduction and possibly a few other things.
I hope this helps!
Charlie
Got it! I was able to reproduce the # exactly with the short answer and am now going through the long answer as well.
I tell you, Pralana is so much more valuable than most other tools because it really helps you understand the detail behind the numbers. As such, it's a great tool for learning & thereby helping you to gain more confidence in your plan.
Thanks again Charlie. I appreciate both the short and long answers!
