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CoastMath prepares a full calendar-year return for every plan year. Income becomes adjusted gross income, then taxable income. Ordinary income runs through the federal brackets. Qualified dividends and long-term gains are taxed on top of it at 0, 15 or 20 percent. Payroll tax, the net investment income tax, any alternative minimum tax, and state and local income tax are added to reach the year’s total tax.
The calculation runs after the year’s income, required distributions, conversions and sales are known. It runs again once contributions and shortfall withdrawals settle, so the tax always reflects the year’s final income, including any withdrawals made to pay the tax itself.
Income that counts toward the return:
- Wages, self-employment profit, pensions, annuities and other income streams, at their taxable amounts.
- Dividends and realized gains in taxable brokerage and crypto accounts, and bond interest in a brokerage account that sets a bond income yield. Municipal bond interest is left out, but it still counts toward the taxation of Social Security (see How balances grow each year).
- Traditional-account withdrawals and required distributions, less any qualified charitable distributions. Roth conversions, and the taxable part of any non-qualified Roth or HSA withdrawal, count too.
- The taxable share of Social Security, set each year by your other income and filing status (see Social Security benefits).
Adjustments come off next: pre-tax payroll contributions, pre-tax contributions funded from surplus (only the deductible part of a traditional IRA contribution when a workplace plan phases it out; see Contributions, employer match and limits), the deductible half of self-employment tax, and up to $3,000 of net capital loss ($1,500 if married filing separately). The result is adjusted gross income. CoastMath then subtracts the larger of your standard deduction or your itemized deductions, plus the senior deduction for anyone 65 or older through 2028 and any qualified business income deduction. What remains is taxable income.
Taxable income=Total income−Adjustments−Standard or itemized deduction−Senior and business deductions
Wages $150,000, qualified dividends $4,000 and a $10,000 long-term gain; $20,000 of pre-tax 401(k) deferrals; both spouses 45; filing jointly.
Show data
| Step | Amount |
|---|---|
| Total income | $164,000 |
| Pre-tax contributions | −$20,000 |
| Adjusted gross income | $144,000 |
| Standard deduction | −$32,200 |
| Taxable income | $111,800 |
Brackets, deductions and how they index in later years are in Federal brackets, deductions and indexing. The itemize-or-not comparison is in Itemized deductions.
Taxable income has two layers. Qualified dividends and long-term gains form the preferential layer. Everything else is ordinary and fills the brackets from the bottom. The preferential layer starts where ordinary income ends. How much of it falls in the 0, 15 or 20 percent band depends on that starting point, not on its own size. When deductions exceed ordinary income, the unused deduction reduces the preferential layer.
| Ordinary taxable income$111,800 taxable income less $14,000 of dividends and gains | $97,800 | |
|---|---|---|
| → | 10% on the first $24,800 | $2,480 |
| + | 12% on the next $73,000 | $8,760 |
| = | Ordinary income tax | $11,240 |
| Dividends and gains, stacked from $97,800 | $14,000 | |
| → | 0% on $1,100 up to the $98,900 threshold | $0 |
| + | 15% on the remaining $12,900 | $1,935 |
| = | Capital gains tax | $1,935 |
| + | Payroll tax6.2% Social Security and 1.45% Medicare on $150,000 of wages | $11,475 |
| = | Total tax for the year | $24,650 |
No state was selected, so state and local tax are zero. The alternative minimum tax does not apply at this income.
Details, including loss carryforwards and the net investment income tax, are in Capital gains, dividends and investment taxes.
- Payroll tax. Social Security and Medicare tax on wages, self-employment tax on business profit, and the 0.9% Additional Medicare Tax. See Payroll taxes, self-employment tax and AMT.
- Alternative minimum tax. Only the amount by which the minimum tax exceeds your regular federal tax is added. See Payroll taxes, self-employment tax and AMT.
- Net investment income tax. 3.8% on investment income once modified AGI passes a fixed threshold.
- State and local income tax. Each state starts from federal adjusted gross income, including gains, removes Treasury interest, adds municipal interest from bonds not marked in-state, and applies its own deduction and brackets. Local taxes follow their own jurisdiction. See State and local income tax. The state and local income tax the plan computes also feeds your federal itemized deduction for state and local taxes.
- Early withdrawal penalties are included in total taxes in results. See Early withdrawal penalties and Roth ordering.
The only federal credit CoastMath figures on its own is the child tax credit, which reduces federal income tax (see Federal brackets, deductions and indexing). Credits you enter yourself are applied as described below. The premium tax credit for marketplace coverage reduces your health premiums instead (see Marketplace coverage and premium tax credits).
Use adjustments for tax items the plan doesn’t model, such as an education or energy credit or a deduction you expect to claim. Each one is an annual tax-return amount for the years you choose.
- Above-the-line deduction. Lowers adjusted gross income on the returns you choose. A federal-only deduction is added back for state tax; a state-only one changes only state tax.
- Itemized deduction. Joins your federal itemized total and helps only when itemizing beats the standard deduction. It never lowers adjusted gross income and is allowed under the alternative minimum tax. A state itemized deduction counts only in states that use the state deduction rules (see State and local income tax).
- Credit. Reduces federal income tax (regular tax, minimum tax and capital gains tax) or state income tax, never payroll tax, self-employment tax or the net investment income tax, and never below zero. A refundable credit’s remainder is paid to you: it lowers the year’s total tax and arrives as cash when the year’s tax settles.
- Surcharge. A percentage of the base you pick (ordinary taxable income, all taxable income, capital gains, or the income tax itself), added before credits, with an optional yearly maximum.
Each adjustment applies once, every year or every few years, from the plan start, a year or a milestone, through an end year or milestone (inclusive). A milestone that is never reached never starts an adjustment, and one that never ends it leaves it open. Amounts in today’s dollars rise with your inflation assumption. A start or end inside a year still applies the whole amount for that tax year, and the plan’s first partial year isn’t prorated. Items marked as yours or your partner’s stop after the return for the year of that person’s death.
A scheduled change replaces the tax mode, the flat income tax and capital gains rates, or the state deduction rules choice from a year or from the year a milestone is reached. It lasts until a later change replaces the same setting. When two changes start in the same year, the one lower in the list wins. A change dated before the plan starts is already in effect, and a milestone that is never reached never applies.
Every part of that year’s calculation uses the same settings: withholding on withdrawals, conversion and harvesting limits, the tax target and the final tax settlement. Withholding rates, settlement timing and the tax target themselves stay fixed for the whole plan.
Effective rate is total taxes, including early withdrawal penalties, divided by the year’s income and realized distributions and gains. That denominator includes the full Social Security benefit, not just its taxable share. It also includes required distributions before any charitable offset, employer contributions to workplace accounts and the taxable amount of Roth conversions. In the example, $24,650 ÷ $164,000 = 15.0%.
Marginal rate is the federal ordinary bracket that your last dollar of ordinary taxable income falls in: 12% in the example. It leaves out state tax, the capital gains rate, the net investment income tax, and phase-ins such as the taxation of Social Security or the senior deduction phase-out. The next dollar of income can therefore cost more than the marginal rate shows. A year whose taxable income is all gains shows a 0% marginal rate even when those gains are taxed at 15%.