Your taxes

Each year, LongSpan works out federal income tax, state income tax and payroll tax for your plan as a whole. It charges them on:

• your pay and any other taxable income,
• the part of Social Security the IRS counts as income,
• what you draw from savings that’s taxed on the way out,
• Roth conversions,
• and the dividends and gains in a brokerage account.

Tax on your pay is taken off before it reaches your accounts. Tax your income doesn’t cover is paid from your savings.

How a withdrawal is taxed depends on the account it comes from:

• A brokerage sale is taxed only on its gain, at long-term capital gains rates. The rest is money you put in, coming back.
• A traditional 401(k), IRA or similar account is taxed as income, except any money you put in after tax.
• Roth accounts owe nothing, and neither does an HSA spent on medical costs.
• Cash in a bank account was taxed when you earned it, so it owes nothing.

So drawing $40,000 from a brokerage can cost far less tax than drawing the same amount from an IRA. If you set your plan to draw on a retirement account before 59½, LongSpan also charges the 10% early withdrawal penalty where the account has one.

From age 73, or 75 if you were born in 1960 or later, the tax code requires a withdrawal from each traditional retirement account every year, whether or not you need the money. LongSpan takes it before anything else and counts it as income. Roth accounts have none.

A Roth conversion moves money from a traditional account into a Roth. The amount is taxed as income in the year it moves. Your net worth doesn’t change, so in a year with a conversion, the higher tax bill can be the only sign of it. How LongSpan decides what to convert.

Payroll tax is Social Security and Medicare on what you earn from work: 6.2% for Social Security up to each person’s yearly limit, and 1.45% for Medicare on all of it. On self-employment income you pay both halves, as there’s no employer to pay the other. Above a threshold for your filing status, an extra 0.9% of Medicare applies.

A forecast made before LongSpan added payroll tax shows a dash for it, not a zero.

If you entered your own tax rate, LongSpan charges that one rate on your income in place of the federal and state brackets. One rate can’t be split between federal and state, so those years show the total only. Payroll tax, and tax on brokerage dividends and gains, are still worked out on their own.

In a year another state can tax part of your income, such as pay earned there or stock that vested while you lived there, that state taxes its part. Your home state taxes all of it, then gives you a credit for what the other state charged, up to what it would have charged itself. The state figure adds these up.

A pension, Social Security and withdrawals from retirement accounts are taxed only by the state you live in when you receive them.

If you run your own business, up to 20% of its profit comes off your federal taxable income as the qualified business income deduction. No state allows it, so it lowers only your federal tax.

The effective rate is all your tax, payroll included, divided by the income it’s charged on: everything listed under How LongSpan works out your tax. On the Taxes page it’s worked out over your whole plan, and in the table for each year.