Basic NW and Accounting Question.

[mathjak107]

Should the taxable amount on unrealized capital gains in equity investments be considered a liability in NW calculations. It seems optimistic to include the entire unrealized gains as an asset. However, if I was to pass these appreciated assets to heirs the step-up basis would include the gains. The plot thickens...

net worth is a snap shot of value in the moment , not the future ,not tomorrow

 

[TheWizard]

Some people seem to be confusing Net Worth with "projected net worth". They are very different things. One is today's worth, which does not make assumptions. The other might be considered a projection and adds a bunch of "ifs". If the market grows "x" amount, if I live to be "x years old, if I receive an inheritance from grandma, ....... A projected NW is fine. Net Worth is a point in time and that point is today, not last year and not next year.

Well stated...

 

[TheWizard]

Should the taxable amount on unrealized capital gains in equity investments be considered a liability in NW calculations. It seems optimistic to include the entire unrealized gains as an asset. However, if I was to pass these appreciated assets to heirs the step-up basis would include the gains. The plot thickens...

Well, remember, you'll never get back that one hour per year you spend computing your tax adjusted Net Worth.
So ponder that...

 

[youbet]

On the second part, perhaps it wasn't clear, but I was tugging your leg and it wasn't intended as a cheap shot, but whatever...

What you intend and how you come across seem to be drifting apart……….

End of discussion!

 

[BeWealthy]

net worth is a snap shot of value in the moment , not the future ,not tomorrow

Just pointing out how fickle NW can be from day to day and transaction to transaction. Happy accounting!

 

[pb4uski]

Should the taxable amount on unrealized capital gains in equity investments be considered a liability in NW calculations. It seems optimistic to include the entire unrealized gains as an asset. However, if I was to pass these appreciated assets to heirs the step-up basis would include the gains. The plot thickens...

Yes, it is called deferred income taxes. But few people, including me, bother with it. For individuals, the tax rate on capital gains could be 0% or 15% or more depending on the circumstances... and on top of that you have step up in basis if the person dies where that deferred income tax is effectively erased... so it is a crapshoot to decide the right tax rate.

Deferred taxes on tax-deferred accounts can also be tricky in that the tax rate can vary depending on how you drain those accounts and your personal circumstances.

With corporations, deferred income taxes is easier because the corporate tax rate is constant. It was 35% when I was working and is now 21%.

 

[RunningBum]

Should the taxable amount on unrealized capital gains in equity investments be considered a liability in NW calculations. It seems optimistic to include the entire unrealized gains as an asset. However, if I was to pass these appreciated assets to heirs the step-up basis would include the gains. The plot thickens...

This just shows why you there isn't just one "net worth" for all situations.

For determining when you can retire, or calculating a withdrawal amount using a WR% * NW, you could reduce NW by the taxable amount on unrealized gains, or factoring it into your expenses. Just because it may be tricky to determine the tax rate doesn't mean you should ignore it. Likewise the deferred tax liability on your tIRA and 401K should be handled this way.

For estate purposes, because of the step-up in basis you would not reduce by estimated taxes.

If calculating net worth for other reasons, decide what makes the most sense. I only do the two NW calculations for the reasons given above.

 

[Montecfo]

Then what would be useful?

Well, if I were accounting for my investments and issuing financial statements to myself, and I purchased an annuity for $500k (large chain of implausible "ifs"), I would not record a $500k expense. I would find that to be illogical and inconsistent with my status as a "going concern". So I would value it at the discounted value of the anticipated payments over my anticipated lifespan. For which I expect the initial value would likely be around $500k.

The user of the financial statements (me) would not be misled by this. Especially since I would accompany my personal financial statements with a letter saying they were fairly stated but for the treatment of the annuity.


Issuer and user would be happy and no one misled. But of course I would never do any of this IRL.

 

[mathjak107]

throw in a decade or two of social security and or pension too .


these are all the reasons i never take part in threads about net worth comparisons….its really useless comparing when everyone adds in different things .
my feeling is unless everyone is comparing apples to apples ,i dont bother posting.

you want some feel good number for yourself , great . but these net worth surveys when they come up are not worth responding to

 

[pb4uski]

Yes, in the case of the life annuity, a life pension and SS you need to be living in order to be eligible to receive that payment, so recognizing the life annuity as an asset but not the life pension or SS is totally inconsistent, which is why the accounting standard setters don't recognize ANY life contingent cash flows assets.

IMO, better to not recognize them as assets, disclose their existence and the details in the footnotes to the financial statements and let the user of the financial statement include them to the extent that they wish to. In fact, you could even disclose the expected present value of the contractual cash flows if you want to. Then, if a creditor wished to include those cash flows in making a credit decision that is their right.

 

[Rianne]

Yes, in the case of the life annuity, a life pension and SS you need to be living in order to be eligible to receive that payment, so recognizing the life annuity as an asset but not the life pension or SS is totally inconsistent, which is why the accounting standard setters don't recognize ANY life contingent cash flows assets.

IMO, better to not recognize them as assets, disclose their existence and the details in the footnotes to the financial statements and let the user of the financial statement include them to the extent that they wish to. In fact, you could even disclose the expected present value of the contractual cash flows if you want to. Then, if a creditor wished to include those cash flows in making a credit decision that is their right.

That makes sense. Example: $1M - treasury bond, 4% coupon. I'm using that $40K as income and would not include it in NW. However, if I reinvest that $40K it is included in NW.

 

[dmpi]

I compute two NW values, one before taxes and one after taxes. I didn't compute the after-tax NW until I was doing large Roth conversions. I didn't want my hundreds of thousands in taxes I have paid not to move my net-worth. Having two NW numbers gives you an ideal of future liabilities but under normal conversation I would normally only refer to and use the pre-tax NW.

 

[mathjak107]

taxes not taken out because it’s a traditional have a future tax liability.

taxes are an expense no different then any other expense .

if you have a roth you paid those taxes up front and that money is gone .

it no longer plays a roll in net worth .

on the other hand the traditional will reflect those taxes in future net worth down the road along with all other expenses …

many here are trying to play pretend here with money that is either not theirs yet or money that is spent on taxes or annuity products and is just not theirs as far as snap shot day