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Old 05-08-2017, 10:51 AM   #41
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....So if one was actually following the accounting guidance, the rate for many of us with large tax-deferred balances would probably be 39.6%, which is beyond goofy IMHO.
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Actually we do know the rate. If you had to raise all the money you can today you would sell everything to get a cash figure. Your tax is determined by this years bracket on all taxable money. That tax due needs to sent to the IRS and whats left from the proceeds of all sales is what you have. .....
While it is convenient to think of the DTL as taxes that would be due if you sold all your taxable account investments or withdrew all your tax-deferred money... and it is a fair way to think of it for US corporate DTLs because of the corporate rate structure.... it doesn't really work that way. The guidance says:

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ASC 740-10-30-9:
Under tax law with a graduated tax rate structure, if taxable income
exceeds a specified amount, all taxable income is taxed, in substance,
at a single flat tax rate. That tax rate shall be used for measurement of
a deferred tax liability or asset by entities for which graduated tax rates
are not a significant factor. Entities for which graduated tax rates are
a significant factor shall measure a deferred tax liability or asset using
the average graduated tax rate applicable to the amount of estimated
annual taxable income in the periods in which the deferred tax liability or
asset is estimated to be settled or realized. See Example 16 (paragraph
740-10-55-136) for an illustration of the determination of the average
graduated tax rate. Other provisions of enacted tax laws shall be
considered when determining the tax rate to apply to certain types of
temporary differences and carryforwards (for example, the tax law may
provide for different tax rates on ordinary income and capital gains). If
there is a phased-in change in tax rates, determination of the applicable
tax rate requires knowledge about when deferred tax liabilities and
assets will be settled and realized.
This rarely comes into play in the US in practice because there is little progressiveness in US corporate tax rates and they quickly become 35%... so generally 35% is used and any differences caused by the graduated tax structure of US corporate income taxes are immaterial.

So you would have to schedule out the realization of your taxable account unrealized gains and apply 15% and schedule out the realization of your tax-deferred accounts and apply ordinary rates... so there is little wonder that so few people do it.

Now what is interesting is an apparent conflict in the guidance in SOP 82-1 and the ASC... I suspect that the ASC would trump a 35-year old SOP, but I don't really know for sure... when I was working I might have thought that to be an interesting question.. but I am now retired.
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Old 05-08-2017, 10:57 AM   #42
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OP, nope
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Old 05-08-2017, 11:29 AM   #43
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No i do not, if i drop dead and my son inherits everything that is about what he would receive as the step up value. ......
Your wife is not in your will ? Seems like she would contest it, if you die.
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Old 05-08-2017, 01:13 PM   #44
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While it is convenient to think of the DTL as taxes that would be due if you sold all your taxable account investments or withdrew all your tax-deferred money... and it is a fair way to think of it for US corporate DTLs because of the corporate rate structure.... it doesn't really work that way. The guidance says:



This rarely comes into play in the US in practice because there is little progressiveness in US corporate tax rates and they quickly become 35%... so generally 35% is used and any differences caused by the graduated tax structure of US corporate income taxes are immaterial.

So you would have to schedule out the realization of your taxable account unrealized gains and apply 15% and schedule out the realization of your tax-deferred accounts and apply ordinary rates... so there is little wonder that so few people do it.

Now what is interesting is an apparent conflict in the guidance in SOP 82-1 and the ASC... I suspect that the ASC would trump a 35-year old SOP, but I don't really know for sure... when I was working I might have thought that to be an interesting question.. but I am now retired.
WOW

The deal is if a person has that hypothetical $1m portfolio and looses a lawsuit (post #8) he really doesn't have $1m to deliver. His case should be I can liquidate pay the IRS and that's what I have left. Not sure how the courts would see it but that's all he has without incurring a big tax bill.
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Old 05-08-2017, 01:19 PM   #45
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...So you would have to schedule out the realization of your taxable account unrealized gains and apply 15% and schedule out the realization of your tax-deferred accounts and apply ordinary rates... so there is little wonder that so few people do it.

Now what is interesting is an apparent conflict in the guidance in SOP 82-1 and the ASC... I suspect that the ASC would trump a 35-year old SOP, but I don't really know for sure...
I agree, although SOP 82-1 is pretty clear and it's the only standard I'm aware of that deals directly with personal NW. What you described is exactly the blended rate approach I mentioned earlier, even though I don't actually use it to reduce tax-deferred balances.

To me, even more interesting is that personal NW is based on a liquidation assumption, as if you were dead on the statement date. And not just taxes; real estate is to be valued net of estimated selling costs and commissions. Corporations use a going-concern assumption so the deferred tax assets and liabilities you referred to arise from timing differences between GAAP and tax, not some goofy assumption that all assets are liquidated as of each balance sheet date.

I may not be the healthiest person, but I like to think of myself as a "going-concern," whose gross assets represent future earning power, sufficient to cover all spending, including future tax liabilities as they come due. If I was on my death bed, or had no cash left like Sears, then liquidation accounting becomes appropriate.
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Old 05-08-2017, 01:28 PM   #46
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If an estate leaves 100k in face value ibonds currently worth 150k where an inheritance tax is due, the tax is due on 150K. If the estate liquidated them the day before and paid the tax it may be worth 140k which is the real worth of the estate.
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Old 05-08-2017, 01:35 PM   #47
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I don't include future taxes in today's NW number.
Similarly, I don't include future capital gains or dividend payments in NW number.
All I include are current assets / liabilities.
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Old 05-08-2017, 01:41 PM   #48
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For my purposes I don't worry about immediate liquidation. I estimate taxes as if I'll liquidate assets over time rather than dump the whole tIRA at once with much of it taxed in a higher bracket. Chances are good I won't liquidate all of my estate before I go, but I'm not concerned with figuring the dollar amount I'll leave to my heirs. It's well under the current estate limit unless that changes.
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Old 05-08-2017, 01:45 PM   #49
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I don't include future taxes in today's NW number.
Similarly, I don't include future capital gains or dividend payments in NW number.
All I include are current assets / liabilities.
Future capital gains and dividend payments are in no way similar to 401K/tIRA income you've deferred taxes on. If you want to handle the tax on the deferred income as an expense when you incur it, that's perfectly fine, but to compare it to possible gains that may never come is absurd.
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Old 05-08-2017, 02:00 PM   #50
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I agree, although SOP 82-1 is pretty clear and it's the only standard I'm aware of that deals directly with personal NW. What you described is exactly the blended rate approach I mentioned earlier, even though I don't actually use it to reduce tax-deferred balances.

To me, even more interesting is that personal NW is based on a liquidation assumption, as if you were dead on the statement date. And not just taxes; real estate is to be valued net of estimated selling costs and commissions. Corporations use a going-concern assumption so the deferred tax assets and liabilities you referred to arise from timing differences between GAAP and tax, not some goofy assumption that all assets are liquidated as of each balance sheet date.

I may not be the healthiest person, but I like to think of myself as a "going-concern," whose gross assets represent future earning power, sufficient to cover all spending, including future tax liabilities as they come due. If I was on my death bed, or had no cash left like Sears, then liquidation accounting becomes appropriate.
Yes, it is definitely an antiquated standard... I worked on the corporate side and never ran across personal financial statements... the really odd part is that when you die the DTLs on unrealized gains go "poof" because heirs get a stepped-up basis and the DTLs on tax-deferred get passed on.

I guess perhaps the guidance's focus on liquidation value derives from the use of personal financial statements mostly for credit decisions, where liquidation value to pay off a loan is arguably relevant... but it makes no sense in a going-concern world.
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Old 05-08-2017, 03:03 PM   #51
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Future capital gains and dividend payments are in no way similar to 401K/tIRA income you've deferred taxes on. If you want to handle the tax on the deferred income as an expense when you incur it, that's perfectly fine, but to compare it to possible gains that may never come is absurd.
Of course they are different. Absurd to handle the way I (and many others do)? No. BTW - who knows how the tax laws will be when we finally distribute gains / dividends. One could argue it's absurd to include our WAG on those as well. But no matter....I've just answered the OP's question about how I personally handle NW calc. You do it however you want, makes no difference to me.
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Old 05-08-2017, 03:28 PM   #52
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I estimate taxes as if I'll liquidate assets over time rather than dump the whole tIRA at once with much of it taxed in a higher bracket. Chances are good I won't liquidate all of my estate before I go, but I'm not concerned with figuring the dollar amount I'll leave to my heirs. It's well under the current estate limit unless that changes.
I am probably misunderstanding your point, and I apologize. But my understanding is that non-spousal inherited tIRA's are not subject to estate tax (or exempted from it if less than ~5M). They are subject to income tax and the non-spouse beneficiary must start taking RMD's within the year (or the year after?) inheriting the account. Or they must withdraw all funds within 5 years. That is my rudimentary understanding of how inherited tIRA's will be administered.

Under the most optimistic projections of the fidelity RIP tool, there may be significant funds in our tIRA in 30-35 years (God willing). This amount is not exempt from or subject to estate tax. If the beneficiary is expected to withdraw all funds over 5 year period, presumably he/she will pay a high tax rate on those withdrawals.

So I know this is more concerned with future tax on assets after death, which I don't think is exactly what OP was talking about, but it is something that weighs on me when I think about our assets/legacy.

I hope I misunderstand this, and look forward to be corrected. This is an area where DH and I need to educate ourselves regarding a good tax-efficient strategy at this point.

ETA: It looks like tIRA in a large enough estate maybe subject to estate taxes, and also income tax? I guess there are worse problems to have, but still...
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Old 05-08-2017, 03:46 PM   #53
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NW is just a number for fun, it has no practical valve for me. That's not the number I would use to determine my net estate to heirs, nor is it the number I use to calculate SWR.
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Old 05-08-2017, 04:37 PM   #54
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Of course they are different. Absurd to handle the way I (and many others do)? No. BTW - who knows how the tax laws will be when we finally distribute gains / dividends. One could argue it's absurd to include our WAG on those as well. But no matter....I've just answered the OP's question about how I personally handle NW calc. You do it however you want, makes no difference to me.
If you read my post I said:

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If you want to handle the tax on the deferred income as an expense when you incur it, that's perfectly fine
so I clearly wasn't calling handling taxes as an expense as they come due absurd.

What I called absurd was the notion that unknown future income is similar (your word) to deferred income.

And BTW as I've already said, future tax rates are a WAG whether you subtract the tax liability from your "net worth" or include it in your future budgets.
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Old 05-08-2017, 04:49 PM   #55
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I am probably misunderstanding your point, and I apologize. But my understanding is that non-spousal inherited tIRA's are not subject to estate tax (or exempted from it if less than ~5M). They are subject to income tax and the non-spouse beneficiary must start taking RMD's within the year (or the year after?) inheriting the account. Or they must withdraw all funds within 5 years. That is my rudimentary understanding of how inherited tIRA's will be administered.

Under the most optimistic projections of the fidelity RIP tool, there may be significant funds in our tIRA in 30-35 years (God willing). This amount is not exempt from or subject to estate tax. If the beneficiary is expected to withdraw all funds over 5 year period, presumably he/she will pay a high tax rate on those withdrawals.

So I know this is more concerned with future tax on assets after death, which I don't think is exactly what OP was talking about, but it is something that weighs on me when I think about our assets/legacy.

I hope I misunderstand this, and look forward to be corrected. This is an area where DH and I need to educate ourselves regarding a good tax-efficient strategy at this point.

ETA: It looks like tIRA in a large enough estate maybe subject to estate taxes, and also income tax? I guess there are worse problems to have, but still...
I wasn't necessarily talking about leaving a tIRA, and since I don't think my estate will be large enough to be taxed, I'm not too educated on your question. I do know that heirs have to start taking RMDs but don't recall the details. Might be worth a new thread to get your question answered since I don't think it was part of the OP's point. Many have probably tuned out of this thread (like I probably should have!).
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Old 05-08-2017, 07:45 PM   #56
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I wasn't necessarily talking about leaving a tIRA, and since I don't think my estate will be large enough to be taxed, I'm not too educated on your question. I do know that heirs have to start taking RMDs but don't recall the details. Might be worth a new thread to get your question answered since I don't think it was part of the OP's point. Many have probably tuned out of this thread (like I probably should have!).
I forget what my point was, except I thought I might be veering off topic, and conflating NW and retirement planning with estate planning.

I think I am a better lurker than poster, so back into the woodwork I go...
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Old 05-09-2017, 02:36 AM   #57
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. . .my understanding is that non-spousal inherited tIRA's are not subject to estate tax (or exempted from it if less than ~5M). They are subject to income tax and the non-spouse beneficiary must start taking RMD's within the year (or the year after?) inheriting the account. Or they must withdraw all funds within 5 years. That is my rudimentary understanding of how inherited tIRA's will be administered.
. . .
If the beneficiary is expected to withdraw all funds over 5 year period, presumably he/she will pay a high tax rate on those withdrawals.
Rules are outline in IRS Pub 590-B https://www.irs.gov/pub/irs-pdf/p590b.pdf see Pages 5-10
--Beneficiary has option to take deceased's RMD in year of death if they were taking RMDs but RMDs must take begin in year after death unless they choose the 5 year option, which may be used if decedent died prior to taking any RMDs
--Beneficiaries of a deceased beneficiary do not calculate required minimum distributions using their own life expectancies, but continue to take RMD based on deceased beneficiary’s distribution schedule previously established based on their life expectancy.
--Distribution are taxed as ordinary income
--Roth IRA is generally distributed by the end of the fifth calendar year after the year of the owner's death unless it is payable to designated beneficiary based on life expectancy of designated beneficiary. Not subject to income tax.
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Old 05-09-2017, 06:07 AM   #58
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Two investors have assets exceeding liabilities (other than income taxes) by $1M. One has his $1M in taxed accounts, all CD's. The other has hers entirely in a traditional IRA.

It is just illogical to contend that both have the same net worth, $1M.

Having said that, what is most important is that taxes are considered in some way in the budget, since they will be paid. They do not have to be considered as part of net worth, IMHO.
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Old 05-09-2017, 06:56 AM   #59
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I don't worry about accounting for taxes in my net worth because they are handled after withdrawal. I have rough estimates for taxes based on long term averages after withdrawal and this gives me a ballpark of my after tax income.

Most of our assets are in taxable accounts and generate highly variable taxable income every year. < 15% are in tax deferred and we don't plan to tap them until we get to 70. Yep - probably take a 25% haircut on those.
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Old 05-09-2017, 07:39 AM   #60
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Two investors have assets exceeding liabilities (other than income taxes) by $1M. One has his $1M in taxed accounts, all CD's. The other has hers entirely in a traditional IRA.

It is just illogical to contend that both have the same net worth, $1M.

Having said that, what is most important is that taxes are considered in some way in the budget, since they will be paid. They do not have to be considered as part of net worth, IMHO.
I agree, but also consider these two retirees:

1. No investments, but has pension with COLA and SS income of $100K/yr. NW=$0.

2. No pension or SS, but has $1M investments from which he draws $40K/yr. NW=$1M

Retiree #2 has higher NW, but less than half the spending capacity of retiree #1. Seems to me, this is a much bigger issue with NW comparability than taxes on tax-deferred accounts. In this case, it's a very poor comparative indicator of the real economic position of the 2 retirees. Sure, if they both converted their assets to cash, #2 wins. But who does that?

NW is fine as a long-term wealth-tracking metric. It's more complete than tracking investments alone, especially for people with debt, rental properties, or other significant non-financial assets. But as a tracking metric, I think relevancy, simplicity, and consistency across time are more important than the finer points of asset measurement. And direction is more important than absolute value.

So... make up whatever NW rules are relevant for your situation, keep it simple, measure it consistently across time, and don't worry about comparing to other people or external benchmarks because it would be quite rare that you are actually comparing apples to apples.
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