How to use Tax Estimate and Simplified Form 1040

Tax Estimate overview

The Tax Estimate and Details area provides an overview of tax rates and sample tax forms for each proposal by year through the end of the planning horizon. This module allows advisors to illustrate the client's effective tax rate, ordinary income tax rate and capital gains tax rate throughout the financial plan. Users can also review the federal tax form 1040, schedules 1-4, schedule A, schedule B, schedule D, form 6251(AMT) and taxable Social Security worksheet.

Tax estimate graphs

The tax estimate graphs found in the Tax / Tax Estimate / Estimate tab illustrates the client's tax rates over their life expectancy. Advisors can choose between graphs that illustrate effective tax rate, ordinary income tax rate or capital gains tax rate. Tax rates can be evaluated for each proposal by using the dropdown menu at the upper right corner of the graph. 

Effective tax rate graph

The effective tax rate illustrates the taxes paid, divided by the client's adjusted gross income amount. The client's AGI can be seen on line 7 of the sample 1040 form in the Tax > Tax Estimate > Details tab. Tax rates can be evaluated for each proposal by using the dropdown menu at the upper right corner of the graph. 

Federal income tax graph

The Federal income tax graph illustrates the client's ordinary income tax bracket each year over their life expectancy. Tax rates can be evaluated for each proposal by using the dropdown menu at the upper right corner of the graph. 

Capital gains tax graph

The capital gains tax graph illustrates the client's capital gains tax bracket each year over their life expectancy. Tax rates can be evaluated for each proposal by using the dropdown menu at the upper right corner of the graph. 

Updates

Tax forms have been updated to reflect changes made for tax year 2018. Clients' tax details are reflected within the new form structure.

The new tax forms will display for all years, even those after the current tax laws are set to expire in 2025. As a reminder, you can select whether you want the current laws to sunset after 2025 when doing tax projections.

Form 1040

To access a client's Form 1040, navigate to the client and select Tax > Tax Estimate > Details. This screen now reflects the new "simplified" 1040. This shorter form only displays key details and information that will apply to almost all clients. It also includes a line to reflect the Qualified Business Income deduction introduced in 2018.

Line 1 Wages, Salaries, tips: Reflects total wages, salaries, tips etc. less contributions to the clients 401(k) or comparable retirement plans, pre-tax insurance premiums and tax deductible expenses.

Line 2a Tax-exempt interest and 2b taxable interest: This value is based on the returns from bonds and cash in taxable accounts held in the client's asset allocation. To view or customize the interest assumptions by asset class advisors can use the Advisor Portal > Assumptions > Asset Return area. Withdrawals from a taxable account are not needed to trigger interest on the 1040.

Line 3a Qualified dividends and 3b ordinary dividends: This value is based upon the returns from equities and 'other' investments held in taxable accounts within the client's asset allocation. To view or customize the dividend assumptions by asset class advisors can use the Advisor Portal > Assumptions > Asset Return area. Withdrawals from a taxable account are not needed to trigger dividends on the 1040. Within the Profile > Expenses tab, advisors can use the Tax and Fees card to modify the percentage of dividends that are tax-qualified.

Line 4a IRA's, pensions and annuities and 4b taxable amount: This value represents taxable distributions from IRA's, pensions, annuities and taxable accounts.

Line 6 Total Income: This value reflects the sum of lines 1 thru 5, from the 1040, and line 22 of Schedule 1.

Line 8 Standard deduction or itemized deductions from Schedule A: This value will reflect the standard deduction based on the filing status as well as itemized deductions if using TCJA Sunset 2025 tax law or 2017 tax law. Tax law can be adjusted in the Profile > Expense > Taxes and Fees card.

Line 9 Qualified Business Deduction: This value illustrates the QBI deduction for any income associated with self employment and business types LLC, partnership, or S Corp, as well as any 'Self-employment income' cards. The deduction reflects 20% of business income.

Line 12 Child tax credit and any amount from Schedule 3: Child tax credits are automatically entered for children listed in the Profile > Family tab.

Line 15 Total Tax: Total federal tax paid by the client in the chosen year.

Tax schedules

Much of the information that was previously on form 1040 can now be found in new schedules that will be filed with form 1040. Schedules 1, 2, 3, and 4 have been replicated in RightCapital with the appropriate information. Find the new schedules under the left-hand drop-down box on the Details screen:

All four schedules are found on the same screen under "Schedule 1-4".

  • Schedule 1 includes additional income sources no longer shown on the main 1040 screen, as well as additional adjustments and deductions.
  • Schedule 2 will show if clients need to pay the Alternative Minimum Tax (AMT). For more details, select "Alternative Minimum Tax" from the drop-down menu.
  • Schedule 3 shows education and retirement credits.
  • Schedule 4 reflects additional taxes including self-employment tax, IRA early withdrawal penalties, and net investment income tax.

RightCapital also includes Schedule A, B, and D, as well as Form 6251 (for Alternative Minimum Tax) and the Social Security Benefits Worksheet (for Taxable Social Security).

For more information, visit the IRS site for the new forms.

Filing status

If there is a client and co-client, RightCapital assumes Married Filing Jointly tax filing status.  We do not currently support Married Filing Separately.

If there is a single client, you can choose between Single and Head of Household filing status.  The default is Single.  To change the filing status, go to the Profile > Expense > Tax and Fees card: