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PART1
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1986-10-25
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* UNCLE *
FEDERAL TAX ANALYSIS AND SPREADSHEET
MAXIMUM EXCLUDABLE LIMITS FOR 403(b) AND 501(c)
CIRCULAR E AND WITHHOLDING ALLOWANCES
PAYSTUB ANALYSIS
FUTURE VALUES
(C) COPYRIGHT 1985, 1986
by
ARCON Research and Analytical Services
ALL RIGHTS RESERVED
2
Figure 1. UNCLE MASTER MENU
3
INTRODUCTION
You will find this handy program a great help in
your insurance-investment business and/or your
personal tax planning (Figure 1). You should find
the program for maximum excludable limits for
403(b) and 501(c) contributions indispensable in
protecting both you and your client's best
interests. The future value routine will give an
uncluttered illustration of accumulation of funds
in an account with either lump-sum, periodic, or
combined deposits both taxed and untaxed. The
routine for calculating the proper number of
allowances and withholdings for the federal W-4
form based on year-to-date information will enable
you to exactly prepay the amount you and your
client deem desirable. You may quickly determine
taxes owed by your client in the same routine if
you desire.
The tax analysis and spreadsheet module enables a
user to perform powerful situational projections of
tax liabilities which could save a taxpayer
hundreds, if not thousands, of dollars each year.
Corresponding adjustments in federal withholdings
are easily made since the federal Circular E is
built into the system.
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PURPOSES AND OBJECTIVES
There were three primary reasons for the inception
of UNCLE which account for its usefulness and
popularity. The first was the incredible amount of
confusion in the annuity industry over sections in
the I.R.S. code, particularly 403, 501, and 415.
Calculations that define maximum contributions to
these plans defy interpretation by the average
citizen even though he be an I.R.S. agent or
annuity agent. Even the official I.R.S. Publication
517 lends itself more to misunderstanding than to
clarification, the worksheets being a matter of
trial and error but inadequate in giving the actual
maximums needed (see Appendix B - Publication 517).
A second reason was the need to demonstrate the
savings represented by a deferred annuity (or other
investment, for that matter). The client may need a
professional to prepare his taxes after any damage
has been done, but he is in far better need of a
tax projection and analysis, including a paystub
adjustment for withholdings, BEFORE the decisions
have been made.
It is important for the client to know, and for the
agent to demonstrate clearly, the exact
relationship between the annuity or other
investment and the immediate impact on his
pocketbook. How convenient it would also be if all
of the files for storing this data could be stored
on one diskette and retrieved for update at the
touch of a finger!
The third reason, of course, is the assumption that
within a very short period every agent worth his
salt will have a small microcomputer and printer
right on his desktop.
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WHAT IT'S ALL ABOUT
Maximum Excludable Contributions & Future Values
for 403(b) & 501(c) Plans
The tax-sheltered annuity, or TSA, is the sister of
the IRA. Assuming the reader knows about the IRA,
the TSA is a far better program, but is only
available to certain kinds of employees of
non-profit organizations, for the most part
teachers and church workers. Unlike the IRA, the
TSA may be annuitized at any time, withdrawals are
not penalized by the government, and deferred
contributions may only be made through payroll
deduction. The maximum exclusion allowance
originally defined the limits that may be deferred;
however, in later years certain catch-up provisions
complicated the year-to-year maximums. Worksheets
were devised to assist the layman in avoiding
over-contributions; however, the actual mathematics
is much more involved than it would appear on the
surface, leading to a great deal of confusion and
inability on the part of the IRS to police the
administration of these accounts (Figure 2).
To maintain simplicity it has been necessary to
rule out certain unlikely events, in particular:
a) An employer making contributions on behalf
of an employee which are additional, but
unrelated, to income. Example: pension
values are group owned and no fixed
individual values are known.
b) An employer contributes to an IRA or SEP. It
is difficult to determine the status of such
amounts.
c) When an individual also contributes to a
KEOGH.
d) The program is not adapted to exceptions
made in the code for church-related
employees; however, no harm will result from
using limits established for the other
occupations.
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It is extremely important that the operator
understand the definition of each parameter input
in the computer program and the meaning of each
dependent function which is output. The meanings of
terms used here are slightly different than those
in the IRS code. Reasons are given for these
differences in the GLOSSARY.
RETIREMENT OPTION:
There are three possible contribution limits. If a
plan is in the calendar year of retirement the
client may choose the RETIREMENT OPTION. This may
not be a higher value than another option. Under
this OPTION the client is not given reduced limits
for contributions made prior to ten years before
retirement. This is one of three benefits known as
catch-up provisions. If this option, often called
an election, is chosen then any prior exclusions
that may have exceeded the level option may be
subject to back taxes and penalties.
LEVEL OPTION (ALSO CALLED GENERAL ELECTION):
If a client chooses this option, his annual
contribution remains the same each year and need
not be recalculated. It will probably be much lower
than the SINGLE YEAR OPTION at first, but in later
years a client may be able to exclude larger
amounts than he would have otherwise been able to
do. If he does decide to raise his contribution
above this limit, there is no problem, provided the
amount does not exceed the SINGLE OPTION - but the
former LEVEL OPTION must now be recalculated and
the limit will drop to a new value. The advantage
to this option lies in the fact that during the
period chosen (usually through retirement), the
annual maximum excludable contribution will remain
the same provided employment status does not
change. There may or may not be an actual advantage
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over annual recalculations. It is strongly advised
that the LEVEL OPTION be rechecked occassionally
for accuracy. This is necessary for the SINGLE
OPTION, which will vary each year.
The advantage to the level option is that it does
not fit the definition of IRREVOCABLE ELECTION as
do the other options, whereby one may find that
although he could benefit from a different option
he cannot change his mind. There is no actual need
to make an irrevocable election, except to justify
exclusions that exceed this amount, and this amount
may not be any less than one of the other options.
SINGLE OPTION (ALSO CALLED ANY-YEAR LIMITATION):
You may decide to choose this option at any time,
provided previous exclusions do not exceed the
level option and you do not fear loss of the
retirement option. The maximum contribution will be
higher than the LEVEL OPTION in early years, but
will gradually drop each year. The program projects
a series of annual recalculations based on current
maximum contributions by both employer and
employee. The least permitted maximum limit under
this option would be the same as that for the LEVEL
OPTION except that another catchup provision allows
for up to $4000 additional contributions or $15,000
- whichever is less. We have found the SINGLE
OPTION to be of more benefit to our clients then
the LEVEL in nearly all cases since future
circumstances are open to a great deal of change.
This option is an exclusion to the extent that it
must be rechecked annually, and if at some point
the maximum is no greater than one of the other
options, except for the level option, it is not
possible to switch.
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OVERALL ELECTION:
The overall election may benefit clients who have
little time in service. Clients with much time in
service and little in the way of previous
contributions will probably do well to avoid making
this an irrevocable election, since the single
year's option will provide the best long term
ceiling on contributions. However, especially if
reductions in salary are tax-deferred, which they
have recently become in the state of Washington,
the single year's option may be of benefit only for
a brief period of time. It is worthwhile to point
out that while most teacher's in Washington may
have felt that making their state retirement
contributions tax-deferred was a good idea, this
change effectively barred them from putting similar
amounts in good tax-deferred private plans that pay
more than twice the interest that the state plan
provides, not to mention far more attractive other
features.
One last point should be mentioned about the
options one may take and the OVERALL ELECTION in
particular. The employer's contributions in the
form of additions to salary are a part of the
maximum exclusion allowance at all times; however,
these amounts may not come directly off the limits
as would otherwise be calculated, except in the
case of the OVERALL ELECTION. This is one of many
reasons that the use of worksheets should be
avoided since such methods cannot easily handle the
true complexity of the calculations.
THE PROGRAM:
When the menu first appears, you will be asked for
a series of inputs. The GLOSSARY is provided to
explain each one. A poor understanding of the
intended parameters could cause a serious problem.
A client and agent may perhaps both be best
protected by a signed data collection form. Failure
to provide the proper figures should absolve the
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agent of error. Excess contributions are taxable in
the year made and subject to penalties. The future
value program is a companion routine for the tax
sheltered annuity limit calculations. It was made
to be extremely simple yet much more compact and
versatile than the sheaf of tables we used to
grapple with.
FUTURE VALUES:
The future value portion of this module needs
little explanation. Interest rates are equivalent
to effective annual yields, compounded annually,
and a simple table gives a quick illustration of
what an initial deposit, a monthly deposit, or
combined amounts will yield in the future. Deposits
are credited at the beginning of each month. While
in actual practice deposits could be credited on
different days, and made more or less frequently,
the monthly method is most common and gives results
which are comparable with other circumstances
without the necessity of unduly complicating the
routine.
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Figure 2. Excludable Limits / Future Values Menu
Figure 3. Primary Input Screen for Maximum Limits
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MAXIMUM EXCLUDABLE LIMITS
THE MODULE - STEP BY STEP (FIGURE 3)
INPUT >>>> Annual Gross Salary
This does not take into account employer additions
to salary that go into retirement plans, but it
does include reductions (deferred only) that would
otherwise be included in taxable income.
INPUT >>>> Each Current Year Excluded Additions
This is usually a percentage of gross salary that
is credited to an employer sponsored plan.
INPUT >>>> Each Current Year Excluded Reductions
This also is generally a percentage which matches
additions to salary - IMPORTANT - only deferred
reductions need be reported.
INPUT >>>> Total Previous Contributions Additions
Employer additions to salary as in the current
year but total of such amounts prior to the current
year.
INPUT >>>> Total Previous Contributions Reductions
Employer deferred reductions, total prior to the
current year.
INPUT >>>> Current Employee Cont's Other Plans
IRA contributions do not count here, however any
other (e.g. 401k) deferred compensation plans that
reduce salary do count (normally this is zero).
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INPUT >>>> Total Past Employee Contributions
Again, this must include all other plans except
IRA's, but MUST include past TSA contributions
(normally, this is ALL that will be included).
INPUT >>>> Years Past Service + Current
Attempt at least one decimal place in this answer,
converting months to decimal years; for example, a
teacher who began service September 1 would have
0.33 years plus subsequent years, the current year
counting as one full year. Any part time work must
be given fractional credit based on the fraction of
work normally considered to be full time.
Figure 4 shows options after initial data input:
Figure 4. Maximum Excludable Limits - Options
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CHOOSE >>> (1) SINGLE (each year separately)
This choice allows the user to see what the current
year's maximum, corresponding to the any year's
election, will be. The following screen will show:
Figure 5. Output for Single Year Election
INPUT >>>> HOW MANY YEARS TO ILLUSTRATE?
The question here is self-explanatory, but what do
the results indicate? Normally, each successive
year will be lower than the year before. The
purpose of this projection is to allow the user to
determine a series of maximums, assuming that
current year's additions and reductions to salary
continue in the future, plus the indicated maximum
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is taken each year. Do not be misled - if the
maximums indicated are not met then the following
years will have higher maximums. Use of this
method, provided it was required to defend
contributions in excess of the LEVEL LIMIT, will
later disqualify use of the RETIREMENT ELECTION and
the OVERALL ELECTION unless one desires to pay
backtax and possible penalty on excess past
contributions.
THIS IS AN IMPORTANT FEATURE: in no other way can
this valuable information be obtained - the user
can immediately foresee the value of one option
over another, a feat that, while necessary for good
judgment regarding the TSA, can otherwise be
attained only with the aid of a fortune teller.
CHOOSE >>> (2) LEVEL (fixed amount for period)
Figure 6. Level Option Output Screen.
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This choice (Figure 6) will show what a client may
be able to take as an every year's contribution
without fear of seeing his maximum decline each
year. There is an important difference between the
LEVEL LIMIT and the OVERALL ELECTION: the latter
will prevent use of the RETIREMENT ELECTION at a
later date, a matter which may or may not warrant
merit. It is important to compare the two, since an
unwary person may commit himself to the OVERALL
ELECTION and forfeit other catch-up provisions
without realizing that the LEVEL OPTION provides as
large or larger a limit. The LEVEL OPTION requires
no ELECTION to be made, since it represents the
original exclusion allowance. Note that the LEVEL
OPTION, if calculated for a period of one year,
simply reduces to the minimum exclusion allowance
referred to in government publications. The purpose
of choosing a planned period of years is simply to
avoid both having to recalculate a maximum each
year and making an irrevocable election. It also
provides an easy method of figuring excess past
contributions.
INPUT >>>> Years in Period (Current + Future)?
Simply choose any desired period for a planned
LEVEL OPTION. This will conserve later use of any
of the catch-up provisions or other options;
HOWEVER, if one later decides to use one of the
other options he must then recalculate a new LEVEL
OPTION, which will be reduced by past
contributions. If his salary has increased by a
significant amount and contributions have been less
than maximum it may later be to his advantage to do
just that.
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CHOOSE >>> (3) RETIREMENT (last year of service)
Figure 7. Retirement Option Screen Output
The RETIREMENT ELECTION (Figure 7) may be taken the
last year of sevice (may or may not be the year of
retirement). Re-employment in another district
begins TSA calculations anew. The only advantage to
this ELECTION is that only the last ten year's
contribution affect the outcome, and a high ceiling
is also allowed (this may not be an advantage).
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INPUT >>>> Years Service through Retirement?
Input the TOTAL years of service - the computer
will only use the last ten in its calculations if
the number is larger than ten.
INPUT >>>> Total Cont 10 yrs-ret (employer)?
Input additions to salary for the last ten years to
state plans or other employer plans.
INPUT >>>> Employee Cont last 10 yrs?
Include here any reductions to salary for the last
ten years. This figure should include both
reductions (deferred only) to salary that went into
state or employee sponsored plans AND any
contributions to TSA or deferred compensation
plans.
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FUTURE VALUES STEP BY STEP (Figure 8):
Figure 8. Input/Output for Future Value Routine.
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INPUT >>>> INITIAL DEPOSIT
Include here any rollover amounts. For illustrative
purposes it may be desirable to combine this with
monthly deposits.
INPUT >>>> DESIRED CONTRIBUTION PER MONTH
This could be a TSA contribution, an IRA, or
another tax-deferred deposit. Frequencies other
than one month are sometimes encountered, but in
the field, the numbers output will not vary
significantly for illustrative purposes.
INPUT >>>> TAX BRACKET
For comparative purposes, the right-hand column
will discount all payments, including lump
rollovers, by the percentage indicated by the tax
bracket. This is as it should be for TSA's, IRA's,
and the like, which use before tax dollars. It is
NOT appropriate for some comparisons, e.g.,
tax-deferred interest buildup using taxed
principal. The tax also reduces the accumulated
interest - in other words the comparison features
fully tax-deferred monies and interest versus a
fully taxed investment.
INPUT >>>> EFFECTIVE ANNUAL INTEREST
If interest quoted is compounded other than
annually (this is unusual) then use the actual
annual yield. In the illustration, payments are
credited at the beginning of each month, so the
output may differ slightly from other illustrations
obtained from other sources.
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FAST AND ACCURATE
Federal Taxes and Withholdings
WHAT IS CIRCULAR E?
Circular E is the IRS publication which enables the
employer to withhold the appropriate amount of tax
from each paycheck which will ideally prepay the
amount owed for that taxable year when all such
amounts are combined. Obviously, the higher the
income, the larger the withholding will be. On the
other hand, no formula by itself is able to take
into account deductions or adjustments to income
which vary from person to person; therefore, the
government provides a W-4 form for the taxpayer to
adjust the withholdings by making allowances,
either for dependents or for estimated deductions.
Many people are quite good at using the worksheet
provided on the W-4 form and using the Circular E
tables to adjust the allowances; however, the
computer, if given the proper information, can do a
much more accurate and error-free job.
A client may come to you in the middle of the year
and is either having a great excess withheld from
his check for Uncle Sam (the more likely case) or
he is not having enough withheld and is due for a
shock. Circular E will be a great mystery to your
average client, as it is to a many agents. Quite
often, an attempt to use it correctly in the
presence of a client will cost you his confidence
and/or your sanity, perhaps both permanently.
USE ONLY INCLUDABLE SALARY
Before using the withholding program you MUST know
what your client's payroll division is going to use
as a wage, either annually or periodic, in
determining how much to withhold based on the
allowances your client, based on YOUR advice, has
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submitted with his W-4. If certain amounts, for
example deferred compensation, deferred retirement,
or tax-sheltered annuities, are going to be
excluded from the gross, then you, like payroll
division, also must use the salary which is for the
purposes of payroll withholdings, INCLUDABLE salary
or wage.
Next, you must know how much tax must be paid. You
may use instead the amount you intend to have
prepaid, the object here being to have that amount
exactly withheld from the beginning to the end of
the taxable year. Of course, you must also know how
much has already been prepaid, through both the
client's withholdings and those of his spouse. Most
paystubs will have a year-to-date figure. Barring
that, an estimate can usually be arrived at if the
checks are regular and approximately equal in
amount. Obviously, if more has already been prepaid
than the amount that needs to be prepaid, then the
computer will figure enough allowances to result in
zero withholdings from now through the end of the
year. In entering the amount already prepaid, be
sure you have included any amounts you know will be
paid from other sources outside of the salary
withholdings.
IT IS NOT NECESSARY to perform withholding
calculations in the presence of a client, and
usually safer not to. Simply obtain the required
information, preferably in advance, and use UNCLE,
a procedure you will find much easier and more
flexible than Circular E once you have practiced it
a few times. Later on you will be able to show off
in front of your clients!
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THE TAX AND WITHHOLDING MODULE
STEP BY STEP (Figure 9)
Figure 9. Tax & Allowance Menu with Paystub Analysis
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CHOOSE >>> FEDERAL TAXES OWED
This option allows a rapid shortcut to tax owed
using net taxable income and filing status. These
are the only inputs and should be self-explanatory.
CHOOSE >>> ALLOWANCE CALCULATION
This provides a valuable paystub analysis which
will provide the proper current number of
allowances and any additional to meet a given
withholdings target for the year. The percentage of
the actual projected tax to be prepaid is also
illustrated. A major advantage of this method,
which is probably only provided by the UNCLE
program, is that both client and spouse paystubs
can be analyzed at one time.
INPUT >>>> ANNUAL AMOUNT TO BE PREPAID
Whether for the client or spouse, simply input the
projected or desired total amount of tax to be
prepaid by means of withholding from this salary.
Any withholdings prior to this date should be
included. Add miscellaneous sources if desired.
INPUT >>>> INCLUDABLE PERIOD INCOME
Whatever period is used, be it daily, monthly,
weekly, etc., input the gross salary for that
period LESS any that is set aside for deferred
retirement by the employer and LESS any deferred
contributions to TSA's or other deferred comp.
INPUT >>>> NUMBER OF PERIODS PER YEAR
This is a little more flexible than most methods,
since any number of periods may be used, rather
than weekly, monthly, etc. Input the total number
of pay periods in the taxable year.
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INPUT >>>> (S)SINGLE OR (M)MARRIED
It is necessary to indicate whether the taxpayer is
single or married.
INPUT >>>> AMOUNT ALREADY WITHHELD THIS YEAR
Input the total withheld from this salary with
miscellaneous amounts if included in total - from
the first of the year to date.
INPUT >>>> PAY PERIODS REMAINING THIS YEAR
Figure how many periods are left for withholding
purposes for this salary only.
OUTPUT >>> ALLOWANCES TO CLAIM
Put this number on the appropriate line on the W-4
form. If the number is greater than 14 the computer
will ask if you desire the calculation to stop at
that point. More than 14 requires the employer to
send the information to the IRS for examination
which could lead to an inquiry.
OUTPUT >>> OVERWITHHELD
If more than 14 would have been required to avoid
overpayment and only 14 are to be taken, the excess
withheld each period will be indicated here.
OUTPUT >>> ADD (additional amount)
On the next line (Form W-4) put this dollar amount
as amount required to be withheld each period
additional to what the allowances indicate.
