The middle column of the Key Figures box details additional elements of the tax return.
We will be using the sample tax return for this example.
In this article, we will be reviewing the middle column of the "Key Figures" box, which includes the Filing Status, Marginal Rate, Average Rate/Effective Rate, Safe Harbor, and Tax Exempt Percentage of Income (if applicable) key figures. You can click on the teal question mark icons on the Tax Report and elsewhere in Holistiplan for an explanation of additional details on the item displayed.
Click here to review the article discussing Total Income, AGI, Deductions, Taxable Income, and Total Tax key figures.
Click here to review the article discussing Tax Exempt Interest, Qualified/Ordinary Dividends, ST/LT Capital Gains, Carryforward Loss, and Credits claimed key figures.
- Filing status: This can be single, married filing jointly, married filing separately, and head of household. While the tax rates won’t change based on the filing status, eligibility for certain credits, deductions and account contributions may depend on the filing status.
- Marginal rate: This is the rate at which the last dollar of ordinary income is taxed. Many taxpayers assume that their marginal rate reflects the rate at which all of their income is taxed, which isn’t true. Ordinary income (e.g., wages, interest, IRA distributions, Social Security, etc.) is taxed at progressively higher rates, meaning that different buckets of income are taxed at different rates. For example, if someone is in the 24% bracket, that means their last dollar of ordinary income was taxed at 24%. But they were also taxed at rates of 10%, 12%, and 22% for the respective amounts of income in each of those brackets. This concept is illustrated later in the tax report.
- Average rate: Holistiplan defaults to an average rate determined by dividing the total tax by total income. Some practitioners prefer the concept of the effective rate, which is total tax divided by taxable income. You can toggle between these two rates by clicking on the Average Rate field in the Tax Report before printing.
- 2024 Safe harbor: This represents the amount that the taxpayer needs to have paid the IRS prior to the due date of next year’s return to avoid underpayment penalties. Taxpayers can accomplish this either through withholding from wages, Social Security benefits and retirement account distributions; estimated payments on the IRS’s quarterly system; or a combination of the those. The safe harbor amount is determined by the AGI and the amount of tax on the previous years’ return. In this case, the safe harbor amount reflects what Peter and Paula must pay by year-end of 2024 (or by January 15, 2025 if they plan on making an estimated payment for the fourth quarter of 2024).
- Tax-Exempt Income: If the tax return includes any tax-exempt income – such as interest generated by municipal bonds – we’ll calculate the amount of tax-exempt income as a percentage of total interest income. This can be a key talking point when talking about portfolio construction: higher income clients may want this percentage to be high, as they would likely benefit more due to their higher tax brackets. Conversely, clients in lower brackets may want to see this number lower, due to the limited tax savings they might experience.