Income Tax Loss Test

a worksheet to determine how much in unnecessary income taxes you have been paying

Have you ever taken an Income Tax Loss Test to determine exactly how much unnecessary income taxes you are paying annually? Most people have never even heard of an income tax loss test much less taken one. In order to retire with financial freedom you need to determine the amount of surplus income available for your retirement planning.

(Download the excel worksheet here)

We start by estimate your monthly income needs after taxes; this is the amount you spend on your lifestyle which includes the cost of food, clothing, entertainment, car expenses, mortgage payments, insurance, education costs, and any other expenses not including paying your taxes or making a contribution to a retirement plan.

(#1) $________________ Monthly Need

Next we multiply the monthly lifestyle need times 20 to estimate the annual taxable compensation you need for your monthly lifestyle. The reason we multiply your monthly lifestyle number by 20 is that we are assuming you are in a 40% tax bracket. You may think, “I live in a state that doesn’t have state taxes so my tax rate could not be 40%,” and you would be right. However, you do pay other taxes such as property taxes, gasoline taxes, sales taxes and some states such as New Mexico and Oregon require additional taxes on the amount of gross revenue your business produces.

(#1) Monthly Need $_______________ x 20 = (#2) Gross Need $__________________

We then want to determine your pre-tax business or practice profit. This is the net number after expenses that your business or practice annually produces. You also need to add any income from real estate holdings, dividends and maybe a spouse who also has income.

Net Business or Practice Profit and other income (#3) $ _______________

Net Business or Practice Profit (#3)        $_____________________

              Subtract Gross Need (#2)               $_____________________

                       Equals Surplus (#4)                 $_____________________

The last calculation is to find out how much unnecessary taxes you are paying.

     Take your Surplus (#4)         $_____________________

               Multiply by 40% (.40)         $_____________________  

This is the amount you are unnecessarily paying taxes on!

These surplus funds can be used as deductible dollars to contribute to a qualified retirement plan which would grow tax deferred can be taxable upon distribution. They could also be used as after-tax dollars that could grow tax deferred and can be distributed tax-free at retirement.

If you haven’t already, download the worksheet here and see how much you have been overpaying!