Last Tax Question.

[BaseballRedhawks]

Ok, so i think i just need to get one explanation..
Tax Deferred accounts… When calculating the final market value, how do you know when you need to add back the tax rate * basis at the very end? I was under the impression that you really only need to when they give you a basis different than the initial portfolio MV.
Earn 7% per year over a 20 year time horizon and has an initial portfolio of $100,000
$100,000 invested in a taxable account earning 7% deferred capital gains (cost basis = $100,000)
$100,000 invested in a tax deferred account earning 7 percent.
So for these 2 questions, the first one needs to add back the tax rate… and the basis is 1. But is there a specific reason? I thought the point of the very last part was if the basis was different..
Thanks!

 

[Galli]

the 100k is not taxable, therefore you add back the tax you calculated on the full balance.
You could always just isolate the actual $ return and calculate the tax liability on that then reduce the ending portfolio value.

 

[broadex]

Im sure we will be given the tax basis, otherwise you cant calculate the capital gains tax.
As you may already know capital gains tax is tax on the capital gain from the original cost (tax basis) and the selling value. In your first question, the original cost = initial value (which is the value now), however this is not always the case.
Why we add back…its the way the formula is. But if you were to drive the workings from first principle you realise that capital gains tax is essecially tax on the difference between the original cost and the future/selling value. If you search this site for tax questions you realise some pple dont bother to learn the formulas (as these formulas tend to confuse), my opinion is that they make the computations quicker!

 

[myriam2222]

broadex wrote:
Im sure we will be given the tax basis, otherwise you cant calculate the capital gains tax.

- I think if you have no information, tax basis is 1.
- If it is not 1, it will be given.
- If it is a tax deferred account, then tax basis is 0.

 

[zulu007]

Yes, agree with myriam 2222 - that’s what I was assuming / understanding.