Retirement Calculator Tax Treatment

Purpose

The Retirement Calculator can estimate simplified federal income tax so a scenario can be modeled on a more realistic after-tax cash-flow basis. The feature is designed to make tax assumptions visible, not to replace tax software, accounting advice, or professional tax strategy.

Tax treatment can be enabled or disabled in the calculator Profile tab. When disabled, the calculator preserves the pre-tax calculation behavior.

What Is Modeled

• Filing status: Single and Married Filing Jointly.
• 2026 federal ordinary income brackets and standard deduction, inflation-indexed for later modeled years.
• 2026 federal long-term capital gains and qualified dividend brackets, inflation-indexed for later modeled years.
• The normal inflation-indexed age-65 additional standard deduction: $2,050 for single filers and $1,650 per eligible spouse filing jointly in 2026, using each person's age at year end.
• Taxable Social Security benefit rules using provisional income.
• Ordinary-income treatment for wages, pensions, traditional 401k withdrawals, traditional IRA withdrawals, and interest-like income.
• Qualified, ordinary, or federally tax-exempt dividend/yield classification by asset type, with a user override available on investment accounts.
• Taxable brokerage opening basis from the user-entered unrealized gain percentage, followed by average basis per holding. Spending sales, rebalancing, and bucket refills realize gains or losses. Net capital losses offset gains; up to $3,000 reduces other income, with unused losses carried forward.
• 3.8% Net Investment Income Tax on the smaller of net investment income or modified adjusted gross income above $200,000 (single) or $250,000 (joint). Retirement distributions and Social Security are excluded from net investment income; taxable amounts still count toward the income threshold.
• Tax paid as a cash-flow item in April of the following projected year, with the final unpaid liability accrued against ending net worth.

What Is Not Modeled

The current version intentionally excludes state taxes, payroll taxes, itemized deductions, credits, AMT, Roth conversion optimization, tax-loss harvesting, wash-sale adjustments, temporary senior bonus deductions, and lot-level taxable-account cost basis. All modeled gains and losses are treated as long term. Roth withdrawals use a simplified age-59½ rule; contribution basis, conversion history, five-year qualification, and penalty exceptions are not modeled.

Filing Status And Standard Deduction

The displayed 2026 values are the model's base amounts. For later projection years, the calculator increases the ordinary brackets, preferential-income thresholds, basic deduction, and modeled age-65 deductions using cumulative scenario inflation. Social Security taxation and NIIT thresholds remain fixed.

Income Stream Treatment

Social Security Taxation

Social Security benefits are taxed based on provisional income:

provisional income = AGI excluding Social Security
                   + tax-exempt interest
                   + 50% of Social Security benefits

The calculator uses worksheet-style phase-in logic so taxable Social Security never exceeds 85% of annual benefits.

Capital Gains And Dividends

Qualified dividends and long-term capital gains use preferential federal brackets. The calculator stacks preferential income above ordinary taxable income, meaning ordinary income fills lower taxable income space first.

The opening unrealized gain percentage establishes each holding's starting basis. Each subsequent sale removes the corresponding fraction of that holding's basis. For example, selling $10,000 from a holding worth $80,000 with $100,000 basis realizes a $2,500 loss and leaves $87,500 basis.

Only dividend cash actually reinvested increases the estimated basis of remaining taxable holdings. Dividend cash used for spending does not increase that basis.

Dividend Classification

• Broad equity asset class income is treated as qualified dividends by default.
• Cash, money market, taxable bond, and treasury-like asset class income is treated as ordinary income for federal tax.
• Municipal bond asset class income is treated as federally tax-exempt interest and still counts toward Social Security provisional income.
• Unknown classifications default to qualified dividends unless overridden.

Cash-Flow Tax Mode

When tax treatment is enabled, taxes are not just informational. The calculator treats estimated federal tax as a future cash-flow need, pays it using the same withdrawal ordering rules, and reflects that impact in ending balances.

Each year's calculated income tax is paid in April of the following modeled year. Because no later April exists after the projection endpoint, the final year's unpaid liability is reported as accrued federal tax and deducted from ending net worth.

Outputs

Annual projections may include Tax, Effective Tax Rate, Taxable Social Security, MAGI-style income, taxable brokerage stock sales, dividend income, and ending net worth after the modeled tax impact.

Important Note

Tax estimates are simplified educational projections. Tax laws change, and actual tax outcomes can vary materially based on deductions, credits, account details, cost basis, filing situation, state rules, and individual circumstances. Review the Investment Disclaimer and consult a qualified tax professional before making financial or tax decisions.