Overview
Target-Maps are where tax burdens are calculated on relevant cash flows and assets. This is because Target-Maps attempt to assess what capital is available to pay for capital requirements. A client's cash flow financials on their Asset-Map (e.g. Social Security, earned incomes) are meant to be entered as gross values. There are no tax treatments on a client's Asset-Map.
Target-Map Preferences Loss to Tax Settings
To automate loss to tax calculation on cash flows and various asset types for the purpose of generating a financial goal conversation quickly (like "Are we ok for retirement?" or "Are we ok in the event of loss of life?"), Target-Map Preferences are used as global default tax percentage values.
Learn more about all Target-Map Preference settings 👉here.
To access the Loss to Taxes section of Target-Map Preferences, click your likeness in the upper right area, select Target-Map Preferences in the drop menu. Adjust desired tax treatments accordingly for each of the various cash flow and asset types on the General Settings page and use the Save Changes button to save your new values.
Target-Maps will use those percentages for new Target-Maps you create. They are not retroactive for prior Target-Maps. One can always change loss to tax values on specific Target-Maps by clicking the Edit option on the Actions menu (three dots) of the Target-Map. Click the What you have page and edit each funding source there.
Loss to Taxes Defined
Below are important points to consider regarding how Target-Maps use Loss to Tax.
The amount Lost to Taxes is the percentage of the gross value of a financial instrument that will effectively be lost to taxes. Since gross values are commonly used in the Asset-Map and financial statements (like the Household Balance Sheet), a reduction of that gross value is necessary to account for the embedded tax obligation that is due upon consumption for planning purposes.
This figure is not necessarily equal to the marginal tax rate but rather an intelligent accommodation to the amount of unpaid taxes embedded in the gross value that should be discounted for purposes of consumption.
Target-Maps™ do not define nor can they predict a client's "tax brackets".
Target-Map templates are preset with default tax percentages and can be modified to new defaults by the advisor within the Target-Map Preferences. Or, the tax amount can be changed within the specific Target-Map.
Target-Maps apply loss to tax percentage up front.
Loss to Tax is initially determined by the default values of your Target-Map Preference. If you believe a line item should reflect a different tax value, simply click the pencil icon to edit the line item and adjust the tax field as needed.
Applying Tax Up Front Instead of in the Future
Target-Map considers loss to tax for cash flows and assets up front. That's because the amount will be the same as when taxes would be taken in the future (assuming the same amount of tax is applied now and then).
Retirement Funding Example
In our example below, our 30-year-old member wants to accumulate until the age of 60.
He is saving $10,000 annually, and we are applying a net rate of return of 5% (net of fees and taxes).
One line item shows the impact of no loss to tax ($155,332 present value) while the other displays the impact of a loss to tax of 10% ($139,799 present value); present value of the future values at age 60.
At the end of the year, at the age of 59, with a 5% rate of return and not taxed, the future value is $654,388. This can be seen on the Cash Flow Details table.
At the end of the year, at the age of 59, with a 5% rate of return and 10% tax, the future value is $588,950. This can be seen on the Cash Flow Details table.
🎉Now retirement has arrived (60 and beyond)!🎉
How much of that $654,388 of that untaxed savings is spendable? Or, to put it another way: how much could you predict will be lost to taxes to show the client how much is spendable?
If we assess 10% then let's do the math: $654,388 – 10% = $588,949, which is the same future value of the taxed present value cash flow.
Another example
If you have the same tax rate today as you would at distribution, it will be taken from the same amount of money. For example, if I have $1,000,000 in my IRA today, if I double that money in the next 10 years, it’s worth $2,000,000. But we have a 25% tax rate at retirement, so now I have $1,500,000 left to consume.
I have $1,000,000 today. We shall tax it at 25% today, which is a reduction of $250,000. You therefore have $750,000 left to consume. If you double that amount in 10 years, the amount will also result in $1,500,000.
Questions and Answers
Q. What if your client is at a higher or lower tax rate today?
A. Enter the loss to tax rate expected in distribution.
Q. How do I handle the tax of a future sale of a property?
A. Regarding capital gains tax, Asset-Map only displays the current value of the asset provide by the client. The amount the client gets to keep upon liquidation must be upon the advisor to assess.
Q. How do I handle Foreign Taxes
A. If you are aware of the effective tax rates for various financial instruments, such as government-sponsored retirement plans or life insurance, you can adjust your preferences accordingly. However, you have the option to override these settings for each individual instrument based on your expertise. Asset-Map standardizes tax applications to facilitate effective discussions across different jurisdictions. We account for the embedded tax liability by reducing the value of financial instruments. Subsequently, we utilize the net after-tax return on capital to project their influence on any financial forecasts. This approach empowers professionals to strategize for achieving net returns while considering taxes and fees, rather than merely focusing on gross returns.