Andrew’s question:

I have a question regarding tax payment on the personal tax returns. When we’re analyzing financials, we typically use line 61 (total tax) to deduct taxes. I’ve heard from analysts from other financial institutions that they use line 72 (total payments) when deducting taxes. I’m trying to understand what the difference would be in terms of cash flow outcome.

Linda says:

Andrew, there are issues with subtracting federal taxes and with subtracting state taxes. Some lenders do neither because they use a debt-to-income ratio that assumes before-tax numbers. But if you need to subtract federal taxes, neither line 61 nor line 72 are perfect, Andrew. Here is my pick…

Federal Taxes – Total Tax

Line 61 (2013 forms) is the total tax they need to pay that goes along with the taxable income, deductions and credits reported in that year. The timing of the payments? Here are the possibilities:

  • Paid in 2012 which resulted in an overpayment applied in 2013
  • Paid in 2013 as withholding or as estimated taxes
  • Paid in 2014 with the final estimated tax payment in January, with the filing of an extension of time to pay or with the filing of the return

I run the risk of too much information here but to underscore the point that Line 61 is not cash paid for taxes during the year 2013 they may have made some payments related to 2012.

With all of that, you might assume I prefer a different tax number for cash flow, but I do not. Let me cover Line 72 and then I will give my opinion.

Federal Taxes – Tax Paid

Line 72 (2013 forms) is the total tax paid towards the tax due, but again not necessarily what was paid during 2013. Some of it might be estimated taxes a portion of which was not paid until early 2014. Some of it might be an overpayment from the 2012 return that was paid in 2012. And some might be the amount paid in January 2014 with the last estimated tax payment or in April 2014 with their return or when they requested an extension to file the return late.

My pick for Federal Taxes in your cash flow calculation

Neither is the amount, for sure, actually paid out of cash flow during 2013. But Line 61 is the amount that has to be paid based on the income, deductions and credits attributable to 2013.

In my experience, most lenders use Line 61 when subtracting federal taxes. I agree, although I also encourage lenders to consider adjusting that amount if they are projecting significant changes to income due to nonrecurring income or expenses.

Another, for most lenders more rare, reason to adjust is with complicated entities with significant tax deferrals. With those loans, often, lenders are working with full GAAP financial statements so this issue does not come up.

State Taxes

Here you have a whole ‘nother problem. The state taxes listed on Schedule A are the amounts paid, and have the same issues as the federal tax payments listed on Line 72 (see explanation above). One way that lenders can adjust in case there is an overpayment is to offset it by any state tax refunds listed on Line 10 of the 1040 Page One.

Unless a lender is subtracting state taxes *and* is using Schedule A as the source, I do not recommend giving a borrower credit for state tax refunds. It is not a recurring income source, it is just a repayment of overpaid taxes.

If your financial institution subtracts state taxes and uses the state tax return for total tax, you are in sync with the explanation for Line 61 (see above) and do not need to offset by the state tax refund.

The before-tax approach may put some borrowers at a disadvantage

Many lenders use a debt-to-income approach when analyzing 1040 returns for loans to an individual or for the guarantor analysis. If so, their guideline may be based on before-tax cash flow. That completely removes this issue, but it may put at a disadvantage a borrower paying very little in taxes compared to their calculated cash flow.

This happens, for example, when there is a significant Net Operating Loss, a non-cash entry that can significantly reduce tax liability. Or if the borrower has significant, recurring, non-taxed disability payments. So even though the before-tax approach is much easier, the after-tax approach in some cases gives a clearer picture.

Guidelines vary

Keep in mind that guidelines are guidelines and different financial institutions can choose their own. As long as it is legal and consistently applied, there is nothing wrong with a different approach. When it comes to federal taxes, though, I do think your approach of using Line 61 gives a clearer picture.

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Linda Keith, CPA

Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at, she speaks at banking associations on risk management, lending and director finance topics.