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View Poll Results: When calculating your net worth, do you make an adjustment for taxes that will become due when you l
Yes, I adjust for taxes. 15 16.13%
No, it's all mine until the taxes become due. 78 83.87%
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Net Worth - Adjusting for Taxes?
Old 07-28-2006, 12:01 AM   #1
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Net Worth - Adjusting for Taxes?

Calculating net worth should be very simple.* However, it appears that there are multiple ways to perform the calulation (i.e., what is included, what is not).* I'm curious how many members make an adjustment for taxes that will become due when an account is liquidated.* For example, if I calculate my net worth without accounting for taxes, I come up with something in neighborhood of $1.15M* However, in reality, if I were to liquidate all my accounts, Uncle Sam would have his share, leaving me with a net* balance of about $1.04M.* How do you calculate Net Worth:* with, or without, adjusting for taxes?
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 12:05 AM   #2
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Re: Net Worth - Adjusting for Taxes?

It would be hard to figure taxes because one has no way of knowing what the future taxes will be. How could one know what tax bracket you'll be in 10 or 20 years from now.
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 12:13 AM   #3
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Re: Net Worth - Adjusting for Taxes?

I handle estimated taxes as part of my estimated expenses, not as a reduction in net worth, although the net effect is probably the same.
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 08:02 AM   #4
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Re: Net Worth - Adjusting for Taxes?

Quote:
Originally Posted by wab
I handle estimated taxes as part of my estimated expenses, not as a reduction in net worth, although the net effect is probably the same.
I agree. Figure out your expenses. Then figure out how much more you need to pull to cover taxes, then see if it is within a reasonable SWR. Alternatively, compute your SWR, estimate the taxes on that amount and decide if what is left gives you more than enough for expenses.

It gets pretty uncertain when you forecast out more than a few years. Changes from taxed to untaxed accounts, social security coming in, the impact of increasing withdrawls to meet inflation on the marginal tax rate, etc., call for a very conservative estimate. I leave plenty of wiggle room so I can scale back my expenses if the reality is different than my guesstimates.
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 08:54 AM   #5
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Re: Net Worth - Adjusting for Taxes?

Agree with the aboves, handle estimated taxes as a projected expense. Tax law is not constant and this enables you to repeatedly evaluate tax handling as part of your expense planning including when to take from what accounts (eg., Roth, normal taxable, reg IRA, etc).
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 09:14 AM   #6
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Re: Net Worth - Adjusting for Taxes?

Quote:
Originally Posted by GMueller
How do you calculate Net Worth:* with, or without, adjusting for taxes?
When I was using FIRECalc, I was adding taxes to my yearly expenses. In my own ER calculator, I make allowances for changing tax brackets over the next 50 years as my projected taxable income changes: 401K to Roth conversion, RMDs, social security taxes, etc. I also allow for changes in tax laws, although long term changes are naturally hard to predict.
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 09:29 AM   #7
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Re: Net Worth - Adjusting for Taxes?

To calculate net worth, I just add up my investments and savings, plus the value of my pension, plus what I have in the house (value that I can sell it, minus selling expenses, minus the mortgage). Mortgage is the only debt.
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 09:54 AM   #8
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Re: Net Worth - Adjusting for Taxes?

Not sure how (or why) you'd factor taxes into net worth. For most holdings their value increases over time and even if taxable upon withdrawal or liquidation, the growth occurs tax-deferred. Also, different assets are taxed differently depending on whether it's gains, dividends, deferred dollars taxed as income, etc.

For me it works best to ignore taxes re: net worth, but just to factor them into my expenses for planning.
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 10:57 AM   #9
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Re: Net Worth - Adjusting for Taxes?

Quote:
Originally Posted by Scrooge
When I was using FIRECalc, I was adding taxes to my yearly expenses. In my own ER calculator, I make allowances for changing tax brackets over the next 50 years as my projected taxable income changes: 401K to Roth conversion, RMDs, social security taxes, etc. I also allow for changes in tax laws, although long term changes are naturally hard to predict.
Same here. Did you swipe my excel spreadsheet?
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 11:07 AM   #10
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Re: Net Worth - Adjusting for Taxes?

It depends on what you think "net worth" is for, and when. If it is to be spent all at once and soon, then allowing for current tax rates is necessary. If it is to be spent gradually many years from now, then your current tax rates are probably kind of meaningless. If it is to be spent not at all (just live off interest and dividends?) and passed on to heirs, then estate tax may come in (if you are lucky enough to have that much, anyhoo). If you're going to give it all to a charity for homeless elephants, then taxes probably don't come in much at all.
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 11:15 AM   #11
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Re: Net Worth - Adjusting for Taxes?

You are technically correct in saying taxes should be deducted in arriving at your net worth, but because of the tremendous difficulties, if not impossibilities,*in calculating the deferred tax, it is usually always ignored.

For example, if you liquidate all your investments today, you would have one tax amount, but if you liquidate over time and select which investments to liquidate to minimize your yearly taxes, you would have a totally different amount.

Since it is much easier to know what the tax is upon liquidation, it is usually taken as an expense at that point.
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 12:20 PM   #12
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Re: Net Worth - Adjusting for Taxes?

Quote:
Originally Posted by Robert the Red
It depends on what you think "net worth" is for, and when.* If it is to be spent all at once and soon, then allowing for current tax rates is necessary.* If it is to be spent gradually many years from now, then your current tax rates are probably kind of meaningless.* If it is to be spent not at all (just live off interest and dividends?) and passed on to heirs, then estate tax may come in (if you are lucky enough to have that much, anyhoo).* If you're going to give it all to a charity for homeless elephants, then taxes probably don't come in much at all.
Exactly what I was thinking.

Taxes are all relative to the source at the time you liquidate and other sources of income in that tax year. Also, many of us will never spend all or our net worth in our lifetime and the tax considerations then become a whole different animal for our beneficiaries.

I would never calculate taxes as part of my net worth. However, if I were doing a calculation for other purposes like income streams, inheritance potential, etc, then I would include taxes because at that point they would be important otherwise, they are not useful.
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 02:05 PM   #13
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Re: Net Worth - Adjusting for Taxes?

All of my dollars are equal, but some dollars (the after tax dollars) are more equal than others.
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 02:13 PM   #14
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Re: Net Worth - Adjusting for Taxes?

Quote:
Originally Posted by vagabond
Same here. Did you swipe my excel spreadsheet?*
Sadly, the software that I used to code my ER calculator predates not only Excel, but also VisiCalc*

Hey, we mastodons want to retire early too!* 8)
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 03:50 PM   #15
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Re: Net Worth - Adjusting for Taxes?

Most of my investments are in taxable accounts. I pay taxes on the accounts whether or not I withdraw funds. Usually distributions can cover any withdrawal.

When I look at SWR, I account for the 0.5% on average that taxes take out of my investments. In other words, for me 3.5% after taxes is really the most money I can expect to spend in any given year.

I never liquidate the entire set of investments, so that point is kind of mute.

Since I retired, long term capital gains taxes when from 20% to 18% to 15%. And qualified dividends when from short-term rates to 15%. Things are always changing.

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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 05:33 PM   #16
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Re: Net Worth - Adjusting for Taxes?

Your home equity isn't your house's market value alone, it's the market value less the outstanding mortgage balance (which is possibly zero). And it isn't complicated because your adjustable mortgage interest rate might go up or down in the future....or even if you have a negative amortization mortgage. It is the value of your house today minus what you owe on it today. So why isn't your net worth today equal to the value of your assets today minus what you owe on those assets (taxes) today? The asset value and the taxes owed might change tomorrow, but that doesn't change the value calculated today, does it?

Okay, maybe it is semantics, but let's not kid ourselves that what we calculate is really our net worth. It's the next-to bottom line, not the very bottom line.
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Re: Net Worth - Adjusting for Taxes?
Old 07-28-2006, 10:39 PM   #17
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Re: Net Worth - Adjusting for Taxes?

I agree with srinch. Your net worth is your current assets minus your liabilities. And one of your liabilities is of course the taxes that you owe. Since you do not know what future tax rates you'll be in, you can simply use today's rate for your calculation.
If you look at this from a planning standpoint, you are trying to maximize your future net worth, you would rather have your heavy hitter investments (stocks) in a lower tax rate (like a Roth IRA), while lower yielding investments (i.e. CDs) can be in a taxable account.
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Re: Net Worth - Adjusting for Taxes?
Old 07-29-2006, 12:49 AM   #18
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Re: Net Worth - Adjusting for Taxes?

Quote:
. . . Your net worth is your current assets minus your liabilities. And one of your liabilities is of course the taxes that you owe. . .
Maybe I'm missing something, but this makes no sense to me. In addition to paying taxes for the rest of my life, I'm going to have to eat meals for the rest of my life. I'm going to have to wear clothes for the rest of my life. I'm going to have to pay for healthcare for the rest of my life. Why would I subtract taxes from net worth and not these other items? But if I subtract everything I will ever have to pay for in the future from my current net worth, then I will have no expenses.
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Re: Net Worth - Adjusting for Taxes?
Old 07-29-2006, 04:50 AM   #19
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Re: Net Worth - Adjusting for Taxes?


I subtract taxes because they are a claim against my net worth. I believe I can estimate how much is owed with reasonable certainty -- either now, or in the future. I don't feel free to spend what effectively belongs to the Government. There is a significant difference between $1,000,000 an account where taxes have already been paid and $1,000,000 in an account where no taxes have been paid. I prefer to acknowledge that difference by adjusting for taxes. IMHO, it's a shame there is no standardized methodology for calculating networth (with respect to taxes) because the lack of methodology often results in the comparison of apples and oranges.
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Re: Net Worth - Adjusting for Taxes?
Old 07-29-2006, 08:00 AM   #20
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Re: Net Worth - Adjusting for Taxes?

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I subtract taxes because they are a claim against my net worth
what about sales taxes? to be consistent you should also subtract these ... which seems, of course, to make no sense.
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