Calculating Income

[marko]

An idle question on a foggy Saturday morning:

Not counting SS, rental income or anything other than your portfolio, how do you count your income?

Example: If your portfolio made $400K and your SWR is $120K but you only paid taxes on $30K what would you consider your income?

I think it might depend on who's asking; that is, when it's time to do a new car lease, I'd use the total portfolio number (if larger that year) but on a practical day-to-day level I consider my income to be my SWR, then there are instances where I might answer on what I paid taxes on.

Again, limiting it to portfolio only. Just curious.

[Jerry1]

Complicating factor - the portfolio has income (interest and dividends) and it has unrealized capital gains. I wouldn’t look at unrealized capital gains as income. They look good on the screen, but until you realize them, they’re not quite income. Of course that’s an annual issue. If you have a portfolio that’s grown over the years, you have a lot of unrealized capital gains. It’s unlikely that some to most of that isn’t going to be realized.

Therefore, I guess you can say your NW went up $400K, but your income is your withdraws.

[pb4uski]

What do you mean by "made $400k"?

I view income as interest, dividends and realized gains and losses.... but excluding changes in unrealized gains and losses (excluding changes in market values).

So if my stock portfolio started the year at $500k and had $10k of dividends and ended the year at $550k then income would be the $10k of dividends. I would not count the $40k of appreciation until I sell shares and realize it.

My view is probably colored by the fact that much of my career was in financial institutions and the was the definition of income under generally accepted accounting principles for non-trading securities. My view also aligns with what is include in income for tax purposes.

[marko]

Quote:

Originally Posted by pb4uski What do you mean by "made $400k"? I view income as interest, dividends and realized gains and losses.... but excluding changes in unrealized gains and losses (excluding changes in market values). So if my stock portfolio started the year at $500k and had $10k of dividends and ended the year at $550k then income would be the $10k of dividends. I would not count the $40k of appreciation until I sell shares and realize it. My view is probably colored by the fact that much of my career was in financial institutions and the was the definition of income under generally accepted accounting principles for non-trading securities. My view also aligns with what is include in income for tax purposes.

For this discussion, "made $400K" means that the portfolio balance at year's end is $400K higher than what it was on Jan 1 of that year.

[pb4uski]

Quote:

Originally Posted by marko For this discussion, "made $400K" means that the portfolio balance at year's end is $400K higher than what it was on Jan 1 of that year.

Then I would consider income to be the $400k less the change in unrealized gains for the year.... so in my example the ending portfolio value is $50k higher but the change in unrealized gains is $40k so the income is $10k.

[MichaelB]

Quote:

Originally Posted by pb4uski I view income as interest, dividends and realized gains and losses.... but excluding changes in unrealized gains and losses (excluding changes in market values).

Same here

Edit to add - plus any pension income. No unrealized gains, though.

[marko]

Quote:

Originally Posted by Jerry1 Therefore, I guess you can say your NW went up $400K, but your income is your withdraws.

I think this answer is simpler and closer to what I was thinking.

Every three years I'm asked about my income on a car lease application and I'm always thinking twice about what to put down (not that anyone seems to check).

[pb4uski]

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Originally Posted by MichaelB .... Edit to add - plus any pension income. ...

Quote:

Originally Posted by misanman I'm not sure why I would exclude SS or pension from the income calculation so, for me, total income = SS + pension + dividends + interest. I consider portfolio withdrawals as unrelated to income.

Quote:

Originally Posted by marko .... Again, limiting it to portfolio only. Just curious.

Because that is what the OP specified in the OP.

[pb4uski]

Quote:

Originally Posted by marko ... Every three years I'm asked about my income on a car lease application and I'm always thinking twice about what to put down (not that anyone seems to check).

I don't lease but whenver I am asked for income on an application of some sort I use what is shown as total income on our tax return... so in our case it includes interest, dividends, my pension, realized gains/(losses) and IRA withdrawals. And it will include 85% of SS once SS starts.

[tmm99]

I consider my income to be what I file as income on my tax returns. I wouldn't consider unrealized gains as income.

[COcheesehead]

Quote:

Originally Posted by tmm99 I consider my income to be what I file as income on my tax returns. I wouldn't consider unrealized gains as income.

Me too. Everything else is “appreciation”.

[Alan]

HMRC has a definition of income that is used in a couple of situations that is different to the IRS.

Taxable income is exactly what you would expect but you are not expected to pay estimated taxes based on the realized gains of the year just reported and there is no penalty on underpayment of capital gain taxes.

For charitable giving you are allowed to give away as much as you can afford from regular income where “regular income” is from wages, pensions, annuities, interest and dividends. e.g. if your regular income in a year is $100k and your essential expenses including taxes is $50k then you can gift $50k. No reporting is required.

[audreyh1]

Quote:

Originally Posted by marko An idle question on a foggy Saturday morning: Not counting SS, rental income or anything other than your portfolio, how do you count your income? Example: If your portfolio made $400K and your SWR is $120K but you only paid taxes on $30K what would you consider your income? I think it might depend on who's asking; that is, when it's time to do a new car lease, I'd use the total portfolio number (if larger that year) but on a practical day-to-day level I consider my income to be my SWR, then there are instances where I might answer on what I paid taxes on. Again, limiting it to portfolio only. Just curious.

Your retirement income is your withdrawal rate, $120K if you picked that as your SWR, and you pay your $30K of taxes out of that and the rest is available for spending.

Your taxable income was $400K assuming your portfolio was all taxable. This is what the IRS considers your income plus any other from SS, pension, etc. If, however, all earned in tax deferred investments, then that is not taxable income, and not considered by the IRS. What is taxable income is whatever you withdraw from your IRA/401K plus SS, pension, etc.

When I apply for new credit, I use the income reported on my last tax return. I can back that up if I ever need to by showing my tax return.

So the two concepts of choosing SWR to determine income/spending, and income subject to taxes are independent concepts.

Quote:

Originally Posted by marko For this discussion, "made $400K" means that the portfolio balance at year's end is $400K higher than what it was on Jan 1 of that year.

Ah - that’s quite different. A good chunk of that is probably unrealized capital gains, and not taxable income. Income is the distributions - dividends, interest, capital gains distributions plus realized gains from selling assets during the year. Also any withdrawals from tax-deferred accounts such as IRAs and income from pension, SS, etc. Those are what show as taxable income when you file your taxes and what I use if requesting credit.

Quote:

Originally Posted by marko Every three years I'm asked about my income on a car lease application and I'm always thinking twice about what to put down (not that anyone seems to check).

Easy, just use the AGI reported on your most recently filed tax return.

[MarieIG]

For passive income, I take out my tax return and look at it.

I basically considered the dividends and interest.

If I had tax "free" income such as on munis, I would consider that as passive income.

I ignore unrealized capital gains. The change in portfolio value I consider as a change in net worth, not income.


The IRS considers the capital gains (which was a big ouchie last year due to some nasty ole' corp buying one of my stocks and paying a large portion in cash). Typically, I just consider realized capital gains an annoyance, (or a shift of assets) not income. (Yes, I know, I'm alone here.)

[audreyh1]

Quote:

Originally Posted by MarieIG For passive income, I take out my tax return and look at it. I basically considered the dividends and interest. If I had tax "free" income such as on munis, I would consider that as passive income. I ignore unrealized capital gains. The change in portfolio value I consider as a change in net worth, not income. The IRS considers the capital gains (which was a big ouchie last year due to some nasty ole' corp buying one of my stocks and paying a large portion in cash). Typically, I just consider realized capital gains an annoyance, (or a shift of assets) not income. (Yes, I know, I'm alone here.)

Right, I never think of capital gains distributions as income in terms of something my portfolio actually earned, but the IRS sure does and wants their cut!

[sengsational]

I just make up a number. I don't use numbers from tax forms because I set my income there to whatever amount I think will work out for me in the line run. Using dividends and interest also doesn't make sense to me because if I'm a growth investor, I have no dividends, but at least as good prospects for portfolio growth. Take 3 or 4 percent of your portfolio as a starting point and alter as needed.

[scrabbler1]

Another income source which is not treated consistently within the tax code is a refund or rebate of state and local taxes. In the last few years, I have received multiple rebates of property taxes paid. If the rebate occurs in the same year I paid the taxes, and I am itemizing my deductions, then the rebate is simply a reduction of the taxes paid as shown on Schedule D, and it has no effect on my (M)AGI. But if the rebate occurs in a later year, then it has to be added back as income and counts toward my (M)AGI. It all comes out the same as far as taxable income goes, but not with (M)AGI which determines, for example, the ACA Subsidy. It's not like I feel like my income "grew" if the rebate occurred in the following year versus in the same year - they are both offsets to the same taxes paid.

[Jerry1]

Quote:

Originally Posted by sengsational I just make up a number. I don't use numbers from tax forms because I set my income there to whatever amount I think will work out for me in the line run. Using dividends and interest also doesn't make sense to me because if I'm a growth investor, I have no dividends, but at least as good prospects for portfolio growth. Take 3 or 4 percent of your portfolio as a starting point and alter as needed.

That’s what I did. When I bought my truck, I used financing to get a rebate (then paid it off). When they asked me my income, I said I didn’t know. I had just retired and knew any tax return number was way larger than actual. Finally, I just gave him my max budget number of $80K. I don’t think anyone cared or verified the number.

[gwraigty]

I count the cash flow thrown off by the portfolio. Interest and dividends. I don't count capital gains, as they're not necessarily regular.

[scrabbler1]

Quote:

Originally Posted by gwraigty I count the cash flow thrown off by the portfolio. Interest and dividends. I don't count capital gains, as they're not necessarily regular.

When I look at income for tax purposes, I look at my tax returns. But when I look at income for budgeting purposes, I do as you do, and look at only dividends and interest, not the more irregular and erratic cap gains.