Tax Projection Model

Multi-year federal tax calculation system integrating income, deductions, credits, and strategies to project tax liability across lifetime

How it works

The Tax Projection Model calculates federal income tax year-by-year through life expectancy, integrating income projections, deduction projections, retirement contributions, asset withdrawals, and tax optimization strategies. The system handles both ordinary income (wages, IRA distributions, Social Security) and capital gains income with preferential rates, applying the progressive tax bracket structure and above/below-the-line deductions.

  1. 1. Gross Income Calculation

    Sum all taxable income sources for the year

    Gross Income = Wages + Interest + Dividends + IRA Distributions + Business Income + Rental Income + K-1 Income + Other
    Example: Year 2045: $60k Social Security (taxable portion) + $40k IRA withdrawal + $15k dividends = $115k gross income

  2. 2. Above-the-Line Deductions

    Deductions that reduce Adjusted Gross Income (AGI). QBI is a below-the-line deduction and is NOT included here.

    AGI = Gross Income - Retirement Contributions - HSA Contributions - SE Tax Deduction - Other Adjustments
    Example: $115k gross - $0 contributions (retired) - $0 SE tax deduction = $115k AGI

  3. 3. Standard vs Itemized Deduction

    System automatically uses higher of standard deduction or total itemized deductions

    Deduction = Max(Standard Deduction, Itemized Deductions)
    Example: 2024 MFJ: Max($29,200 standard, $35,000 itemized) = $35,000 → Itemize

  4. 4. Taxable Income

    Income subject to ordinary tax rates after all deductions

    Taxable Income = AGI - Max(Standard, Itemized) - QBI Deduction
    Example: $115k AGI - $35k itemized - $0 QBI = $80k taxable income

  5. 5. Ordinary Income Tax

    Progressive tax brackets applied to ordinary income (wages, IRA withdrawals, interest, taxable SS)

    Tax = Sum of (Income in Each Bracket × Bracket Rate)
    Example: MFJ 2024: $23,200 at 10% + $70,975 at 12% + ($80k - $94,175) at 0% (below next bracket) = ~$11k

  6. 6. Capital Gains Tax

    Preferential rates (0%, 15%, 20%) applied to long-term capital gains and qualified dividends

    Capital Gains Tax = Capital Gains × Applicable Rate (based on taxable income)
    Example: $15k qualified dividends, $80k taxable income → 0% rate (below $94,050 threshold) = $0 capital gains tax

  7. 7. Net Investment Income Tax (NIIT)

    3.8% surtax on net investment income (NII) when AGI exceeds the filing-status threshold

    NIIT = Min(Net Investment Income, AGI − Threshold) × 3.8%
Thresholds: $250,000 MFJ | $200,000 Single/HOH | $125,000 MFS
NII = Capital Gains + Interest + Rental/Royalty Income + Passive K-1
    Example: AGI $350k (MFJ), $50k capital gains: Min($50k, $350k − $250k) = $50k × 3.8% = $1,900 NIIT

  8. 8. State Income Tax

    State income tax calculated using the effective rate configured in the Assumptions Panel. Applied to AGI after subtracting any state-specific exemptions for Social Security and retirement income. Auto-added to the SALT deduction bucket.

    State Taxable Income = AGI − SS Benefit (if exempt) − Retirement Income (if exempt)
State Income Tax = Round(State Taxable Income × Effective State Rate)
    Example: $115k AGI, California 7.2% rate, SS exempt: $115k − $60k SS = $55k × 7.2% = $3,960 state income tax

  9. 9. Tax Credits

    Direct reduction of tax liability (not deductions)

    Total Tax = Federal Ordinary Tax + Capital Gains Tax + NIIT + State Income Tax − Tax Credits
    Example: $11k federal tax + $1,900 NIIT + $3,960 state tax - $2k child tax credit = $14,860 total tax

  10. 10. Marginal and Effective Rates

    Marginal rate = rate on the next dollar of ordinary income. Effective rate = total federal tax ÷ AGI for this single year. This is not an average across years; the Summary Tab's Avg Tax Rate card shows the arithmetic mean of combined (federal + state ÷ AGI) rates across every projection year.

    Marginal = Highest Bracket Rate Applied | Effective = Federal Tax ÷ AGI (per year)
    Example: Marginal: 12% (top bracket used) | Effective: $9k federal tax ÷ $100k AGI = 9.0%

Real-world context

Tax Optimization vs Tax Minimization

The goal is not to minimize taxes — it is to optimize financial outcomes. Sometimes paying more tax now (Roth conversions, accelerated gain realization) leads to better lifetime results. The model shows both current-year tax impact and long-term tax efficiency of various strategies.

IRS reference: Publication 17 (Your Federal Income Tax)

Progressive Tax Brackets

The U.S. uses a progressive tax system - you pay different rates on different portions of income. For example, 10% on first $23,200, 12% on next $70,975, etc. (2024 MFJ). Your "marginal rate" (12%, 22%, 24%) is the rate on your NEXT dollar, not your entire income. Understanding brackets is key to tax planning.

IRS reference: Revenue Procedure 2023-34 (2024 Tax Brackets)

Capital Gains Preferential Rates

Long-term capital gains (assets held >1 year) and qualified dividends are taxed at preferential rates: 0%, 15%, or 20% depending on income. These are significantly lower than ordinary income rates (10%-37%). Strategic use of capital gains "stacking" (harvesting gains in 0% years) can save tens of thousands in taxes.

IRS reference: Publication 550 (Investment Income and Expenses)

Above vs Below-the-Line Deductions

Above-the-line deductions (retirement contributions, HSA, QBI) reduce your Adjusted Gross Income (AGI) and are available to everyone. Below-the-line deductions (standard/itemized) reduce taxable income but only if they exceed the standard deduction. Above-the-line deductions are generally more valuable because they reduce AGI-based phase-outs and taxable Social Security.

IRS reference: Publication 17 (Your Federal Income Tax)

Standard vs Itemized Deduction

You automatically get the standard deduction ($30,000 for married couples in 2025). Only itemize if mortgage interest + state taxes + charitable giving + medical expenses exceed this threshold. The model automatically chooses the higher option each year. Deduction bunching strategy deliberately alternates itemizing (high-deduction years) with standard deduction (low-deduction years).

IRS reference: Publication 529 (Miscellaneous Deductions)

RMDs and Tax Timing

Required Minimum Distributions force taxable withdrawals from IRAs starting at age 73 (born 1951-1959) or 75 (born 1960+). These withdrawals can push you into higher brackets in late retirement. Roth conversions in early retirement (before RMDs start) can reduce future RMD amounts and lifetime taxes.

IRS reference: Publication 590-B (Distributions from IRAs), Secure Act 2.0

Net Investment Income Tax (NIIT)

Stratum calculates the 3.8% Net Investment Income Tax (IRC §1411) as a separate component of federal tax liability. NIIT applies when AGI exceeds $250,000 (MFJ), $200,000 (Single/HOH), or $125,000 (MFS). It is assessed on the lesser of net investment income or the excess of AGI over the threshold. Net investment income includes capital gains, dividends, interest, rental income, and passive K-1 income. It excludes wages, active business income, IRA and 401(k) distributions, Social Security, and Roth qualified distributions. NIIT is reported as a separate line in the tax breakdown and is included in total federal tax liability. See Capital Gains Tax help for the complete list of qualifying and non-qualifying income types, and for notes on how K-1 income is classified.

IRS reference: IRC §1411; IRS Form 8960

What drives the result

Income Items
Base Data → Income Section

All income items flow into tax calculation. Ordinary income (wages, IRA distributions, interest) taxed at ordinary rates. Capital gains and qualified dividends taxed at preferential rates.

$100k wages vs $100k qualified dividends: ~$11k tax vs ~$0 tax (if under 0% capital gains threshold)

Retirement Contributions
Base Data → Contributions OR Strategies → Strategic Contributions

Pre-tax contributions (Traditional 401k, Traditional IRA, HSA) reduce AGI and current-year taxes. Roth contributions don't reduce taxes but create tax-free growth.

$23k 401k contribution on $150k salary → AGI drops to $127k → ~$5k tax savings

Itemized Deductions
Base Data → Deductions Section

Only beneficial if total exceeds standard deduction. Mortgage interest, state taxes, charitable giving, medical expenses combine to exceed threshold.

$18k mortgage + $10k state tax + $8k charitable = $36k total > $30k standard → Itemize, save ~$720

Filing Status
Base Data → Filing Status

Determines tax brackets and standard deduction. Married Filing Jointly has wider brackets (lower rates at same income) and higher standard deduction ($30k vs $15k single).

$100k taxable income: MFJ pays ~$11k, Single pays ~$14k (+$3k)

Social Security Claiming Age
Assumptions Panel → Social Security OR Strategies → Social Security Optimization

Earlier claiming = lower benefits = lower taxes (less income). Later claiming = higher benefits = higher taxes. Tax impact is secondary to lifetime benefit optimization.

Age 70 claiming adds $18k/year income vs age 62 → ~$2k more in taxes but $216k more lifetime benefits

Roth Conversion Amounts
Strategies → Roth Conversion

Conversions add to ordinary income in conversion year, potentially pushing into higher brackets. But create tax-free growth and reduce future RMDs.

$50k conversion in 22% bracket = $11k tax now, but eliminates ~$100k in future taxes on growth

Deduction Bunching
Strategies → Deduction Bunching

Concentrates itemized deductions in alternating years to exceed standard deduction more frequently. Reduces average tax rate over multi-year period.

Bunch $20k charitable giving every 2 years instead of $10k annually → Itemize 1 out of 2 years instead of never

Charitable Giving (QCDs)
Strategies → Charitable Giving

Qualified Charitable Distributions (age 70½+) satisfy RMDs but are excluded from AGI. More valuable than itemized deduction for most retirees.

$30k RMD - $10k QCD = $20k taxable income instead of $30k → ~$2,400 tax savings

Business Structure
Strategies → Business Structure

Entity type determines FICA treatment and QBI deduction eligibility. S-Corp K-1 income avoids FICA (15.3% savings), Partnership K-1 subject to self-employment tax.

$100k S-Corp K-1 = $0 FICA vs $100k Partnership K-1 = $15,300 self-employment tax

Assumptions

  • Tax bracket thresholds remain at their configured base-year values unless the Tax Bracket Indexing assumption is enabled.
  • Standard deduction uses the configured year amounts; when Tax Bracket Indexing is enabled, values are indexed forward from the base year
  • Capital gains rates remain at 0%, 15%, 20% levels
  • No Alternative Minimum Tax (AMT) considerations
  • NIIT (3.8% surtax, IRC §1411) is calculated using AGI as a proxy for MAGI — result is identical for most clients; may differ slightly for those with foreign earned income exclusions
  • State income tax is calculated using a flat effective rate when a state is configured in the Assumptions Panel; if no state is configured, state income tax is $0
  • Filing status remains constant (married filing jointly or single)
  • No tax law changes or reforms

Limitations

  • State income tax uses a flat effective rate — does not model progressive state brackets, partial income exemptions, or multi-state sourcing; see State Income Tax help for details
  • Does not calculate AMT (Alternative Minimum Tax)
  • K-1 income is treated as passive net investment income for NIIT purposes by default — may overstate NIIT for clients who materially participate in the underlying business; see Capital Gains Tax help for qualifying and non-qualifying income types
  • Does not account for Additional Medicare Tax (0.9% on earned income above $250,000 MFJ / $200,000 Single) — this is calculated separately in FICA; see FICA Taxes help
  • Does not model tax law changes or sunset provisions (e.g., TCJA expiration)
  • Does not calculate estimated tax payments or withholding
  • Does not model tax credits beyond basic input (no phase-outs modeled)

Related

This page explains how Stratum models this calculation. It is educational material for financial professionals, not tax or legal advice, and tax law changes. Verify current figures against primary IRS sources before relying on them with a client.