A Primer on Tax Projections
Many clients reach out during the year with what appears to be a straightforward question:
At a high level, it can seem like these questions should have quick answers based on known thresholds or general rules. In reality, once multiple variables come into play, those rules of thumb break down quickly.
A tax projection moves beyond estimates and provides a data-driven answer tailored to your full financial picture.
Why “Back-of-the-Envelope” Doesn’t Work
It’s very common to try to estimate tax impact using simple rules of thumb. For example, applying a known tax rate to a stock sale or assuming income will fall within a certain bracket.
The challenge is that the tax system doesn’t work in isolation. Most items on your return interact with one another, often in ways that are not intuitive. Because of this, a quick estimate can be directionally incorrect and, in some cases, materially misleading.
Here are a few examples of how this plays out in practice:
What makes this particularly challenging is that these factors don’t operate independently. A single decision, such as selling stock or converting retirement funds, can:
This layering effect is why a “quick calculation” can be risky. It may overlook secondary impacts that meaningfully change the outcome.
In that sense, relying on a back-of-the-envelope estimate isn’t just imprecise, it can lead to decisions being made on incomplete information. A tax projection addresses this by modeling all of these moving pieces together, so the full impact is understood before any action is taken.
Here's how a tax projection works
1. Understanding Your Objectives
We start by identifying what you are trying to accomplish. For example:
2. Updating Your Financial Picture
We then build a current-year projection using updated inputs, including:
3. Identifying Special Events
Certain transactions can significantly impact your tax outcome and must be modeled carefully. These may include:
4. Evaluating Changes in Deductions and Credits
We also account for changes such as:
5. Running Multiple Scenarios
One of the most valuable parts of a projection is scenario modeling.
Instead of asking:
“What happens if I do this?”
We answer:
“What happens if you do this versus that?”
Examples include:
This allows you to make informed decisions rather than guessing.
6. Coordinating With Your Financial Plan
When appropriate, projections can also be aligned with your broader financial strategy, including coordination with your financial advisor.
This ensures that tax decisions support your long-term investment and cash flow goals, not just short-term outcomes.
What You Get From a Projection
The end result is practical, actionable guidance. This typically includes:
Why This Matters
Without a projection, decisions are often made based on incomplete information. That can lead to:
When You Should Consider a Projection
A projection is especially valuable if any of the following apply:
Our Approach to Tax Projections
We approach tax projections as a collaborative process, focused on answering the specific questions that matter most to you. The goal is not to over-engineer the analysis, but to do the minimum amount of work necessary to give you clear, reliable guidance based on your objectives.
In many cases, a projection can be completed efficiently. Most engagements take approximately 90 minutes, depending on the complexity of your situation and the number of scenarios we are evaluating.
For transparency, we always provide a time and cost estimate in advance, so you know exactly what to expect before we begin.
If you’re considering a financial decision and want clarity on the tax impact, we’re happy to talk through your objectives first. There is no charge for an initial consultation, and we can help you determine whether a projection would be beneficial in your situation.
Please feel free to reach out anytime.
- “If I sell this stock, what will the tax be?”
- “Can I convert to a Roth this year?”
- “How much can I take in capital gains and stay in a lower bracket?
At a high level, it can seem like these questions should have quick answers based on known thresholds or general rules. In reality, once multiple variables come into play, those rules of thumb break down quickly.
A tax projection moves beyond estimates and provides a data-driven answer tailored to your full financial picture.
Why “Back-of-the-Envelope” Doesn’t Work
It’s very common to try to estimate tax impact using simple rules of thumb. For example, applying a known tax rate to a stock sale or assuming income will fall within a certain bracket.
The challenge is that the tax system doesn’t work in isolation. Most items on your return interact with one another, often in ways that are not intuitive. Because of this, a quick estimate can be directionally incorrect and, in some cases, materially misleading.
Here are a few examples of how this plays out in practice:
- Long-term capital gains rates depend on your total taxable income from all sources-- not just the gain itself
- Additional income can trigger phaseouts of deductions or credits
- Net Investment Income Tax (3.8%) may apply once certain thresholds are crossed
- Medicare-related surcharges (IRMAA) can be impacted by income levels
- Retirement contributions and deductions may be limited or reduced
- Qualified Business Income (QBI) deductions can phase out or be limited based on income and business type
- Alternative Minimum Tax (AMT) can apply even when regular tax appears manageable
- Stock compensation (RSUs, ESPPs, options) can create income that is not fully reflected in one place
- Passive activity rules can limit the use of rental losses
- Charitable contributions may be limited based on a percentage of income
- Roth conversions stack on top of other income and can push you into different tax ranges
- Estimated tax penalties depend on when payments are made, not just how much is paid
What makes this particularly challenging is that these factors don’t operate independently. A single decision, such as selling stock or converting retirement funds, can:
- Increase your taxable income
- Push other income into higher tax brackets
- Reduce or eliminate deductions or credits
- Trigger additional taxes or surcharges
This layering effect is why a “quick calculation” can be risky. It may overlook secondary impacts that meaningfully change the outcome.
In that sense, relying on a back-of-the-envelope estimate isn’t just imprecise, it can lead to decisions being made on incomplete information. A tax projection addresses this by modeling all of these moving pieces together, so the full impact is understood before any action is taken.
Here's how a tax projection works
1. Understanding Your Objectives
We start by identifying what you are trying to accomplish. For example:
- Minimizing tax on a large stock sale
- Staying within a specific capital gains bracket
- Evaluating a Roth conversion
- Managing cash flow for estimated payments
- Planning around retirement or a major life change
2. Updating Your Financial Picture
We then build a current-year projection using updated inputs, including:
- Wages and bonus expectations
- Self-employment or business income
- Investment income (interest, dividends, capital gains)
- Retirement distributions
- Rental income or losses
- Prior year carryforwards (losses, credits, etc.)
3. Identifying Special Events
Certain transactions can significantly impact your tax outcome and must be modeled carefully. These may include:
- Sale of a rental property
- A 1031 exchange
- Large stock sales or concentrated positions
- Partnership or K-1 income
- Exercising stock options (ISO, NSO, RSU activity)
- Starting or expanding self-employment
- Retirement or loss of wage income
4. Evaluating Changes in Deductions and Credits
We also account for changes such as:
- Charitable contributions (including donor-advised funds or QCDs)
- Mortgage interest and property taxes
- Business expenses
- Retirement contributions
- Education-related credits or deductions
5. Running Multiple Scenarios
One of the most valuable parts of a projection is scenario modeling.
Instead of asking:
“What happens if I do this?”
We answer:
“What happens if you do this versus that?”
Examples include:
- Selling $50K vs. $150K of stock
- Partial vs. full Roth conversion
- Timing income this year vs. next year
- Different levels of business income
This allows you to make informed decisions rather than guessing.
6. Coordinating With Your Financial Plan
When appropriate, projections can also be aligned with your broader financial strategy, including coordination with your financial advisor.
This ensures that tax decisions support your long-term investment and cash flow goals, not just short-term outcomes.
What You Get From a Projection
The end result is practical, actionable guidance. This typically includes:
- A clear estimate of your projected tax liability
- Insight into marginal tax rates on additional income
- Identification of key thresholds (capital gains, NIIT, etc.)
- Recommended estimated tax payments
- Guidance on adjusting withholding
- Strategic timing recommendations for transactions
Why This Matters
Without a projection, decisions are often made based on incomplete information. That can lead to:
- Unexpected tax bills
- Missed planning opportunities
- Underpayment penalties
- Inefficient timing of income or deductions
When You Should Consider a Projection
A projection is especially valuable if any of the following apply:
- You have multiple income sources
- Your income is changing from the prior year
- You are self-employed or have variable earnings
- You are planning a large transaction
- You are trying to manage tax brackets or thresholds
- You want to avoid surprises at filing time
Our Approach to Tax Projections
We approach tax projections as a collaborative process, focused on answering the specific questions that matter most to you. The goal is not to over-engineer the analysis, but to do the minimum amount of work necessary to give you clear, reliable guidance based on your objectives.
In many cases, a projection can be completed efficiently. Most engagements take approximately 90 minutes, depending on the complexity of your situation and the number of scenarios we are evaluating.
For transparency, we always provide a time and cost estimate in advance, so you know exactly what to expect before we begin.
If you’re considering a financial decision and want clarity on the tax impact, we’re happy to talk through your objectives first. There is no charge for an initial consultation, and we can help you determine whether a projection would be beneficial in your situation.
Please feel free to reach out anytime.
