What the tax engine models

Taxes are usually a household’s largest lifetime expense, and when a dollar is taxed is one of the few levers a plan can pull. Fikata computes detailed tax data each year, on every path.

Federal income tax

• 2026 brackets (10% to 37%) and the standard deduction ($16,100 single, $32,200 married filing jointly, $24,150 head of household), plus the extra deduction at 65 and over
• OBBBA’s senior deduction: $6,000 per filer aged 65 or over for 2025–2028, phasing out at 6% of income above $75,000 (single) / $150,000 (joint), and expiring after 2028 as the law currently says
• Itemizing, when it beats the standard deduction: mortgage interest and state income tax, under the SALT cap as OBBBA set it ($40,400 in 2026, rising 1% a year, phasing down at high incomes, and reverting to $10,000 in 2030). That reversion is a cliff in current law that a long simulation walks straight into, and it is modeled.

Investment income and capital gains

• Long-term gains on the 0% / 15% / 20% schedule, stacked on top of ordinary income. Ordinary income fills the bottom of the ladder first. Someone with $40,000 of wages and $80,000 of long-term gains does not get the first $49,450 of gains at 0%; the wages already occupy that space. Getting this backwards is a common planner error, and it understates tax for nearly every retiree.
• Short-term gains taxed as ordinary income.
• Sales inside 401(k)s, IRAs, Roths, HSAs and 529s realize nothing. Rebalancing inside a retirement account never creates a taxable gain.
• Cost basis of what you hold today. Enter what you paid for an investment account and its existing unrealized gain is taxed when it’s sold (see what you can do).
• Capital losses: netted short against long, the $3,000 deduction against ordinary income, and an unlimited carryforward that keeps each loss’s short- or long-term character.
• Net Investment Income Tax: 3.8% on the lesser of investment income or income above $200,000 / $250,000. Wages, traditional distributions and pensions are excluded, as the law requires.
• Interest on cash and savings, taxed as it accrues. Municipal bond interest, entered as “Other” income marked tax-exempt interest, is untaxed but counted where the law counts it (see below). Fikata doesn’t model municipal bonds as holdings.

Social Security

• Up to 85% of benefits taxable, on the provisional-income formula. Its thresholds ($25,000 and $34,000 single; $32,000 and $44,000 joint) have never been raised for inflation, and Fikata keeps them fixed, as the law does.
• Provisional income includes tax-exempt interest, so municipal bonds don’t hide income from the formula.
• Pre-tax contributions reduce provisional income, so they shelter part of a benefit as well as part of a salary.
• A large Roth conversion or capital gain in the same year can make much more of a modest benefit taxable. Fikata reports taxable Social Security as its own line so you can see when this happens.

Payroll and self-employment tax

• FICA on wages: 6.2% Social Security up to the wage base, per earner, and 1.45% Medicare with no ceiling. Two earners each under the wage base pay more than one earner at twice the base, and Fikata models that.
• Additional Medicare Tax (0.9%) on combined household earnings above $200,000 / $250,000.
• Self-employment tax on 92.35% of net earnings, with half deducted from income.
• Payroll tax applies to gross pay. The standard deduction and 401(k) deferrals don’t reduce it.
• Pensions, IRA and 401(k) withdrawals, rent, interest and capital gains carry no payroll tax. That’s a large part of why retirement income is cheaper than the same dollars of salary.

Retirement accounts

• Traditional 401(k), 403(b), 457(b) and IRA withdrawals and Roth conversions taxed as ordinary income.
• Pre-tax and HSA contributions deducted from income; employer contributions never counted as your income in the first place.
• Qualified Roth, HSA and 529 withdrawals untaxed.
• Contribution and catch-up limits enforced and raised with inflation.
• Required minimum distributions from the Uniform Lifetime Table, starting at the SECURE 2.0 age for each owner’s birth year.

State income tax

• All 50 states and DC, from the Tax Foundation’s 2026 tables, including flat-tax and no-income-tax states.
• Social Security: exempt in the states that exempt it. For the eight states that tax benefits, seven have their actual relief rules modeled: income cliffs (New Mexico), phase-outs (Minnesota, Vermont), partial exemptions (Connecticut), and age-based exemptions (Colorado).
• Capital gains taxed as ordinary income, as nearly every state does, despite the federal break. Washington’s capital gains tax (7% above $262,000; 9.9% above $1 million) is modeled, with real-estate sales exempt as the law provides.
• State standard deductions and personal exemptions, not the federal figures.
• Depreciation recapture taxed as ordinary income at the state level; no state has a special rate for it.

Real estate

• Rental depreciation: straight-line over 27.5 years (residential) or 39 (commercial). Land is carved out and never depreciated.
• Schedule E netting: rent minus property tax, insurance, maintenance, management, HOA, mortgage interest and depreciation. A rental’s mortgage interest is a business cost and is not limited the way a home’s is.
• Selling a rental: depreciation you’ve taken is taxed at up to 25% (or your own lower rate), not at ordinary rates. The remaining gain is a long-term capital gain.
• Selling your home: the $250,000 / $500,000 exclusion, held at its 1997 level as the law holds it, which covers less of a long-held home’s gain every year.
• Second homes: no exclusion and no depreciation; the gain is a long-term capital gain.
• Order matters, and Fikata follows the law’s order: recapture first, then the home-sale exclusion, then capital gain. So converting a rental to your residence can’t wash away depreciation you already deducted.
• Planned sales: schedule the sale of a property for a future date, or test one in a What-if, and see the tax bill before you list it.
• A loss on a home or second home is not deductible; a loss on a rental is.

When a spouse dies

The survivor moves onto single filing status from the following tax year. The salary, pension and Social Security of the person who died stop at their death. What the survivor keeps (their own income, any survivor pension or survivor benefit, and the whole portfolio) is taxed through brackets roughly half as wide with about half the standard deduction, so taxes can rise sharply on income that barely changed. On a $120,000 pension that continues in full to the survivor, the federal bill rises by roughly three quarters. This is often called the widow’s penalty, and many planners don’t show it.

Survivor benefits are entered as the survivor’s own income. To include a survivor pension or the Social Security survivor benefit, add it as an income for the survivor that starts at the other spouse’s life expectancy.

Future years

• Current law, carried forward. Fikata doesn’t guess at future legislation. Changes already written into law, like the senior deduction ending after 2028 and the SALT cap reverting in 2030, are modeled.
• Brackets, deductions and limits rise with inflation on each path. Holding them flat would invent a decades-long tax increase.
• Figures the law holds fixed stay fixed: the Social Security taxability thresholds, NIIT and Additional Medicare thresholds, the home-sale exclusion, the $3,000 capital-loss limit, and the senior deduction. Their erosion by inflation is real, so it is modeled.
• Withholding during the year is projected from the full year’s expected income, then settled at year end, as it would be in real life.