Before tax return

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d2rockstar

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Which of the two is correct
1. (required after tax return+inflation)/(100%- tax rate%)
2. (required after tax return/(100%-tax rate%))+inflation
Thanks
 
Inflation is always taxable. I have never seen the Government not want to tax you on inflation.
Go with the 1st one.
 
hlmasterchief wrote:
Inflation is always taxable. I have never seen the Government not want to tax you on inflation.
Go with the 1st one.
Click to expand...
Not if the inflation component is tax deferred, you may be only paying taxes on the real spending portion, and inflation portion is reinvested with no tax liability.
 
Let me rephrase the question. Which one is the default way to go if there is no mention of whether inflation is taxable or not?
 
Zeeshan Shafi wrote:
Let me rephrase the question. Which one is the default way to go if there is no mention of whether inflation is taxable or not?
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It’s usually the first one. Unless there is a specific mention of tax deferral, tax advantage, or tax sheild.
But I doubt the CFAI will get that complicated.
 
Zeeshan Shafi wrote:Let me rephrase the question. Which one is the default way to go if there is no mention of whether inflation is taxable or not?
Click to expand...
There is no default way to go.
The vignette will tell you whether inflation is taxable or not.
I wrote an article on this three years ago: http://www.financialexamhelp123.com/inflation-in-required-rate-of-return...
In it, I cite exams from 2007 through 2015; in every case where you had to decide which formula to use, they told you, explicitly, whether inflation was taxable or not.
 
hlmasterchief wrote:Inflation is always taxable. I have never seen the Government not want to tax you on inflation.
Go with the 1st one.
Click to expand...
There are many accounts in which you are taxed only on the amount you withdraw. As you will leave the inflation portion of the return in the account, it would not be taxed.
Please be more careful in your answers, especially during this frenzied last week before the exam. You don’t want to do more harm than good.
 
S2000magician wrote:
hlmasterchief wrote:Inflation is always taxable. I have never seen the Government not want to tax you on inflation.
Go with the 1st one.
Click to expand...
There are many accounts in which you are taxed only on the amount you withdraw. As you will leave the inflation portion of the return in the account, it would not be taxed.
Please be more careful in your answers, especially during this frenzied last week before the exam. You don’t want to do more harm than good.
Click to expand...
Do they have any accounts like that in the US?
 
hlmasterchief wrote:
S2000magician wrote:
hlmasterchief wrote:Inflation is always taxable. I have never seen the Government not want to tax you on inflation.
Go with the 1st one.
Click to expand...
There are many accounts in which you are taxed only on the amount you withdraw. As you will leave the inflation portion of the return in the account, it would not be taxed.
Please be more careful in your answers, especially during this frenzied last week before the exam. You don’t want to do more harm than good.
Click to expand...
Do they have any accounts like that in the US?
Click to expand...
Yes.
Any 401(k) or IRA account works that way.
 
S2000magician wrote:
Zeeshan Shafi wrote:Let me rephrase the question. Which one is the default way to go if there is no mention of whether inflation is taxable or not?
Click to expand...
In it, I cite exams from 2007 through 2015; in every case where you had to decide which formula to use, they told you, explicitly, whether inflation was taxable or not.
Click to expand...
This is not clear to me…what are the key phrases/description that signals we should be treating inflation as taxable or not taxable? Thanks!
 
2008
“… dividends and interest are taxed at 20 percent, and capital gains at 15 percent.”
Here, all returns, whether for living expenses or for inflation, are taxable. Add inflation, then increase the sum for taxes.
2009
“… a tax rate of 20% [applies] to the … withdrawals from the investment account.”
Here, only the withdrawals are taxable; the inflation component will remain in the account, untaxed. Increase the return for taxes, then add inflation.
 
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