Poll: How do you treat taxes?

[David1961]

I created this poll as a result of reading this thread:

http://www.early-retirement.org/for...ax-deferred-accounts-71744-2.html#post1442662

 

[easysurfer]

I treat it as a PITA

I voted for expense.

 

[marko]

Death as a liability, taxes as an expense.

 

[Alan]

Future taxes is something I spend quite a bit of time planning for since between us DW and I have another 6 future income streams to consider over the next 10 years. (Pensions, SS, UK SS and RMDs).

I treat future taxes as expenses.

 

[MichaelB]

We only have taxable investment accounts so tax planing is pretty straightforward. When we pay taxes we consider them an expense.

In the period soon after leaving the working world I considered the taxes on unrealized gains to be a future (accrued) liability and tried to plan for that. That added lots of complexity to my financial planning without any benefit, and I soon learned (in the '01 - '02 bear market) that unrealized gains could go away and take the unrealized liability along with.

Taxes are a liability for us when the gain has been realized and the obligation incurred but not yet paid.

 

[scrabbler1]

Besides treating taxes as an expense, I divide my current income taxes into two categories. The first are the expected taxes on my expected income, the monthly and quarterly dividend income from my bond and stock funds (the stock fund's dividends are in the 0% federal bracket so they are only taxed at the state level anyway). The second are taxes from my more erratic income from cap gain distributions (again, some are LTCG so they are in the 0% federal bracket). I don't worry about those taxes because I don't rely on those to cover my expenses. That "excess" income from those distributions is used to pay the "excess" taxes.

 

[daylatedollarshort]

We try to treat income taxes as a math challenge to arrive at an answer of zero or better yet, refundable tax credits.

 

[RunningBum]

I put liability, but really it's a combination of both. As I stated in the other thread, I had employee stock options that I knew would take a huge tax hit that couldn't be deferred for too many years, so I discounted the value by the taxes I would pay. It just didn't make sense to me to look at, for example, $1M as $1M when I was only going to get about $600K. Modeling a $400K one time expense didn't really make sense to me, especially when trying to figure out when I had enough to retire.

Once I did that, I realized my 401K and IRA would also take a tax hit at some point, so I discounted that by an estimated tax rate of whatever I think I'll be paying when I pull that. I know some will say I can't know what rate that will be, but isn't that just as true if I was trying to estimate that as an expense? And I know some of you will be paying virtually no income tax in retirement, but that's not my case. I further discount my taxable account by discounting the unrealized capital gains.

I do have an expense item budgeted for dividends I get on my investments, which are fairly consistent. It never occurred to me to try to discount my stocks by dividends, as you asked in the other thread.

Accountant-type people may shudder at my method and inconsistency, but I don't care, unless you show me a significant flaw with my system. Telling me I have to treat it as an expense is not going to fly by itself.

 

[arky]

How about a negative asset ?

Seems to me, as long as you account for it, it doesn't matter what you call it. I voted expense.

 

[Animorph]

I treat it as an expense, including with FIRECalc. However, for net worth calculations I'll subtract out substantial tax liabilities. I don't really use NW for much of anything other than a progress indicator.

 

[Midpack]

• An unpaid expenditure is a liability
• An expenditure which is yet to occur is also a liability
• Thus every expenditure in itself is a liability and every liability in itself is an expenditure.

Read more at Buzzle: Liability Vs. Expense

Expense is an income statement entry, liability is a balance sheet item.

 

[Ronstar]

• An unpaid expenditure is a liability
• An expenditure which is yet to occur is also a liability
• Thus every expenditure in itself is a liability and every liability in itself is an expenditure.

Read more at Buzzle: Liability Vs. Expense

Expense is an income statement entry, liability is a balance sheet item.

True, but if the expenditure is an unknown dollar amount and not yet payable, it shouldn't be considered a liability. The balance sheet is a snapshot of financial condition at a point of time and only the known payable liabilities at that point of time are liabilities for purpose of the balance sheet.

When I was in business, we would include payroll taxes and real estate taxes as operating expenses in our income statement, but they were not in the liabilities in our balance sheet. We did however have payable Illinois state replacement taxes listed as a liability.

Since personally I have no taxes payable, there are no tax liabilities in my net worth statement. And I will include them as expenses in the time period that I pay them.

 

[sengsational]

I have done both. For instance, when calculating the number of years of my current spending rate that was covered by assets, it was easier and more accurate to calculate using a burn rate that did not include taxes, and take care of the taxes by adjusting tax advantaged account balances downward. But day to day net worth calculations are not adjusted.

But based on this thread, I think I'll add another calculation and graph to my net worth spreadsheet to give me an indicator that will not make Roth conversions look "bad", when they are really good.