How taxes are calculated

The engine computes income taxes for every year of your plan, and for every simulated future. Taxes are estimates. They use published rules and your inputs, not your actual tax return.

Where the figures come from

Every tax figure lives in a versioned data file, never in the calculation code. The 2026 federal file holds brackets, deductions, capital gains thresholds, contribution limits, required distribution tables, Medicare premiums and surcharges, ACA figures and more. Each value records its primary source, such as an IRS revenue procedure, a Social Security Administration notice or the statute itself, and the date it was checked.

State files cover all 50 states and DC. A local file covers city and county income taxes. Separate files cover state estate and inheritance taxes.

Federal income tax

The engine computes:

• ordinary income tax brackets, by filing status
• the standard deduction, including the extra amount for people 65 or older or blind
• itemized deductions: state and local taxes under the 2026 cap and its phase-out, mortgage interest, charitable gifts with their limits and floor, and medical costs above the floor
• the limit on itemized deductions in the 37% bracket
• the charitable deduction for people who don't itemize
• the senior deduction, for 2025 through 2028, with its phase-out
• the qualified business income deduction, below the income threshold only
• long-term capital gains and qualified dividends at 0%, 15% and 20%, stacked on top of ordinary income
• capital loss netting, the annual loss limit and carryforwards
• net investment income tax
• alternative minimum tax
• self-employment tax and Additional Medicare Tax
• taxation of Social Security benefits
• the child tax credit and credit for other dependents
• early-withdrawal penalties
• the ACA premium tax credit, reconciled at year end

Medicare Part B and D premiums include income-related surcharges (IRMAA), based on income from two years earlier. In the first two plan years there's no income history, so the engine assumes no surcharge.

State and local tax

The engine starts from federal adjusted gross income or taxable income, as each state does. It removes what the state exempts, such as Social Security or some retirement income. Then it applies the state's deductions, exemptions, brackets and surtaxes. Part-year residents are prorated when you plan a move.

Each state has a badge on the Taxes screen: Modeled, Approximate, No income tax or Not available, with a list of what it leaves out. Local income taxes are included for places in the local data file. Others show as $0 with a note.

Future years

Years after 2026 start from the latest published figures. Amounts the law adjusts for inflation are indexed with the plan's inflation. In a simulation, they follow that future's own inflation path. You can switch to a fixed rate or to no indexing.

Amounts the law doesn't index stay fixed. These include the net investment income tax thresholds, the Social Security taxation thresholds, the Additional Medicare Tax threshold and the capital loss limit.

Changes already written into law are applied in their year. For example, the senior deduction ends after 2028, and the state and local tax cap changes on its legislated schedule.

Congress can change any of this. The app updates its data files when new figures are published.

Timing

Estimated tax is paid monthly from the second plan year, and each year settles in December. State and local estimates paid during a year count toward that year's federal deduction for state and local taxes. In the first plan year, the whole year settles in December, which understates that year's deduction for people who itemize.

Not modeled

Federal:

• the qualified business income deduction above the income threshold, and its wage and property limits
• depreciation on rentals
• the 25% and 28% capital gains rates
• most other credits, such as earned income, education, energy and child care credits
• IRA deduction phase-outs and spousal IRA contributions
• tax on cancelled debt
• the deduction for estate tax paid on inherited income
• underpayment penalties

State: credits beyond personal exemptions, and the items listed for each state on the Taxes screen.

If something that matters to you isn't modeled, treat that part of the result with caution, and check it with a tax professional.