Poll: What % of net-worth do you still have to pay tax on?

[Montecfo]

Quote:

Originally Posted by OnTheBeach When I do my net worth calculations, I calculate the market value, cost basis and tax liability on the unrealized gains so my Net Worth is after paying taxes on unrealized gains. Thus the percentage of my net worth that is taxable is 0%. I assumed everyone did it this way.....yeah yeah never assume. if you don't calculate this way, how can you figure out your annual withdrawal rate? A person withdrawing 3% of a money market annually is much different than a person withdrawing 3% of an 401K that was never taxed.

Sure. But you just estimate taxes as part of your expenses-based upon the account you will be drawing from, etc.

Or at least, that is what I do.

[NW-Bound]

Quote:

Originally Posted by Montecfo For me, not too hard since I know the balances in each account and account type. And unrealized gains are listed by the brokerage...

+1

I just have to have a spreadsheet to sum them up, but I can eyeball it to have an idea.

I never bothered to look at the cap gains in my homes. I have no immediate plan to sell them, plus the gains are small relative to my to-be-taxed investable accounts.

[Danmar]

Quote:

Originally Posted by Montecfo Sure. But you just estimate taxes as part of your expenses-based upon the account you will be drawing from, etc. Or at least, that is what I do.

Agree. Also what I do. Drawing down from a taxable account may have a tax cost which needs to be considered on the spend side. Probably easier to do it this way rather than trying to adjust the draw down percentage. Although, I do agree that best way to calculate net worth would be to include an expected tax liability.

[mrfeh]

Net worth is the current value of all assets minus liabilities.

One can subtract estimated future taxes for planning purposes if they wish, but the resulting number is not net worth.

[Danmar]

Quote:

Originally Posted by mrfeh Net worth is the current value of all assets minus liabilities. One can subtract estimated future taxes for planning purposes if they wish, but the resulting number is not net worth.

Yes, I think it is. If a liability will be created in the realization of an asset it should be accounted for. A good example in the corporate world would be deferred taxes. This is often referred to as the matching principle.

[audreyh1]

Quote:

Originally Posted by OnTheBeach When I do my net worth calculations, I calculate the market value, cost basis and tax liability on the unrealized gains so my Net Worth is after paying taxes on unrealized gains. Thus the percentage of my net worth that is taxable is 0%. I assumed everyone did it this way.....yeah yeah never assume. if you don't calculate this way, how can you figure out your annual withdrawal rate? A person withdrawing 3% of a money market annually is much different than a person withdrawing 3% of an 401K that was never taxed.

No problem. My withdrawal is pre-tax. My spending is after tax. I always computed withdrawal as pre-tax and knew I'd have to pay taxes from it. So estimating annual taxes is important.

[NW-Bound]

Quote:

Originally Posted by mrfeh Net worth is the current value of all assets minus liabilities. One can subtract estimated future taxes for planning purposes if they wish, but the resulting number is not net worth.

Quote:

Originally Posted by Danmar Yes, I think it is. If a liability will be created in the realization of an asset it should be accounted for. A good example in the corporate world would be deferred taxes. This is often referred to as the matching principle.

One is net worth, and the other is "spendable" net worth.

The problem is that, with a progressive tax system, it is difficult to figure out exactly how much one will pay when the spending level fluctuates so much as in my case. My highest spending year was 1.5x my lowest one. That would put me in a higher bracket, if it were not for some after-tax buffer to allow averaging out the WR.

Hence, knowing how much one has in tax-free money is important.

[Danmar]

Quote:

Originally Posted by NW-Bound One is net worth, and the other is "spendable" net worth. The problem is that, with a progressive tax system, it is difficult to figure out exactly how much one will pay when the spending level fluctuates so much as in my case. My highest spending year was 1.5x my lowest one. That would put me in a higher bracket, if it were not for some after-tax buffer to allow averaging out the WR. Hence, knowing how much one has in tax-free money is important.

There is another accounting principle called"best estimate". Ie you take your best shot at it rather than ignoring it. In my case it is easy since I will always be paying at the max marg rate.

But in the overall scheme of things you can do whatever you want in this regard and who cares what the other guy does?

[NW-Bound]

Yes, if you always pay at the same marginal rate, then it does not matter. As for me, "income averaging" is important because I am straddling the tax brackets.

But it is true that one has to allow for Uncle Sam's cut in the budget one way or the other (maybe Aunt Samantha in the frozen north?).

[RunningBum]

Quote:

Originally Posted by OnTheBeach When I do my net worth calculations, I calculate the market value, cost basis and tax liability on the unrealized gains so my Net Worth is after paying taxes on unrealized gains. Thus the percentage of my net worth that is taxable is 0%. I assumed everyone did it this way.....yeah yeah never assume. if you don't calculate this way, how can you figure out your annual withdrawal rate? A person withdrawing 3% of a money market annually is much different than a person withdrawing 3% of an 401K that was never taxed.

That's how I've been doing it. It started when I had stock options that would throw me in the top tax bracket when I had to exercise them. I would be taxed nearly half the value, so it didn't make sense for me to think I had, for example, $2M when I really would barely come away with $1M after taxes. The option money was all tagged for retirement accumulation, so it wasn't part of my budget then, and I'd be forced to exercise them before retirement so using post-tax value to see if I had enough to retire made the most sense by far.

Once I set up my spreadsheet this way I realized my 401K/IRA would eventually be taxed as well, so I reduced those as well, and the cap gains followed. It just made sense to me to treat all my funds the same way, using post-tax value.

The stock options are long gone but I kept the system. It makes budgeting easier for me because I don't have to worry about whether I how to budget for taxes on Roth conversions or if I sell funds with capital gains. It does complicate budget tracking a bit because I have to separate out the income tax paid on that vs. the normal tax on dividends and interest, which I do budget for.

It wouldn't matter to me if I'm the only one that does this. If it's the best way for me to understand my finances, that's what I'm doing. I don't disclose my net worth anyway, so nobody should take issue with how I define my net worth for my own purposes. I may not be doing it the "right" way, but as long as I'm accounting for taxes I'm not doing it wrong.

[Huston55]

Our number is 51% and it was easy to calculate; did it on my phone. Our assets are @ Fido + an old 401k + real estate. Perhaps our AA is simpler than many or, perhaps some are over complicating this. In any case, I think it's a useful number when thinking about future tax planning. Of course, one has to consider what other income streams they have (SS, pensions, etc.) to see the whole picture.

[sengsational]

Quote:

Originally Posted by OnTheBeach I assumed everyone did it this way.....yeah yeah never assume.

I never even thought of netting out any liabilities when calculating net worth. I assumed everyone just added-up their various account statements and maybe pulled their home value from Zillow. Add-up those few numbers and call it a day.

Quote:

Originally Posted by RunningBum That's how I've been doing it.

Interesting discussion about NW calculations with and without adjusting for income taxes. The only time I adjust is calculating the number of years of spend I have....and then it's just a conservative (high) percentage presumed to go to income taxes. Interesting how you got into doing it that way (options, where it made a bid difference).

Quote:

Originally Posted by pb4uski Even if you don't track it if you use Vanguard you can easily look it up. Probably other service providers too I suspect.

Quote:

Originally Posted by pixelville I am surprised that your 401k doesn't split out regular/Roth.

Concerning looking-up things, my 401k (Hewitt) is the one that's the pain. They break-down the account balance "by source", which includes six, count 'em, six buckets (Before tax, after tax, Roth 401k, rollover, and two different flavors of matching due to an old 401k getting pulled into the current 401k). They also give me account balance "by fund", where I have three funds active. So for "Fund A", there are some Roth 401k funds, before tax funds, etc, all six, but they don't give you that detail at the fund level. Technically, I have 18 "positions". That is, if you take all of the flavors (6) times the number of investment vehicles (3). But those details are nowhere to be found. I've called, and they have the details, they just don't exist on the statement or web site.

[CRLLS]

Quote:

Originally Posted by sengsational I never even thought of netting out any liabilities when calculating net worth. I assumed everyone just added-up their various account statements and maybe pulled their home value from Zillow. Add-up those few numbers and call it a day.

I do the same. I add up the pre-tax and after tax accounts and do the math accordingly, Since the tax liability is very complicated if you are mostly in the 15% bracket, when and how you balance the account withdrawals, determining the liability before hand is just a best guess. I know I have to pay taxes when withdrawn, and estimate them as part of my expenses. That is difficult too when trying to juggle ACA subsidy, what year I take SS, which account I take $ from etc...... So net worth to me is what it is worth now, not after someone (the IRS) takes a bite from it.

I do keep track of what my taxable or non-taxable assets are. Not including our home, we are 86% taxable. If I include our home in net worth and its net value as cash assets, it is 77% taxable. Like some others, I'm not sure what relevance the data has as everyone's situation is different.

[Danmar]

Quote:

Originally Posted by NW-Bound Yes, if you always pay at the same marginal rate, then it does not matter. As for me, "income averaging" is important because I am straddling the tax brackets. But it is true that one has to allow for Uncle Sam's cut in the budget one way or the other (maybe Aunt Samantha in the frozen north?).

I guess if you plan on leaving it as a legacy and your assets on demise are under the $5.45 million exemption , your heirs would get a step up and no tax owing? But I'm not that familiar with your estate tax regime.

In Canada the second to die will owe cap gains tax, no exceptions. We generally don't make up personal names for institutions.

[RunningBum]

Taxes are complicated and hard to predict whether you account them before hand or later. If you're only looking at your tax liability at the start of year, you aren't really doing a complete long term budget. Many can get away with this if taxes are pretty even no matter what you do, but if they aren't, you may run into surprises. I feel like I'm at least making an attempt to estimate future tax liabilities my way, rather than just hoping for the best.


Just for example, at least some people here must be living primarily off money in taxable accounts, getting mostly dividends and maybe selling some investments, with small capital gains. They may be able to keep all of this at 0% tax due to being in the 15% bracket. But once they start getting a pension, SS, and tapping IRAs as the taxable account runs down, this is all regular income taxed mostly at 15%. Suddenly the tax part of their budget is likely to go way up.

[pixelville]

Quote:

Originally Posted by RunningBum Just for example, at least some people here must be living primarily off money in taxable accounts, getting mostly dividends and maybe selling some investments, with small capital gains. They may be able to keep all of this at 0% tax due to being in the 15% bracket. But once they start getting a pension, SS, and tapping IRAs as the taxable account runs down, this is all regular income taxed mostly at 15%. Suddenly the tax part of their budget is likely to go way up.

That was the primary reason for this poll. To have us all aware of where we are in this. Specially if you look at the second calculation in the OP, it will make you somewhat more aware of how to plan/even out your taxes in the years to come.
Going forward I am going to be tracking this % as part of my net worth spreadsheet. It is easy enough since all brokers show the unrealized gain/loss on the portfolio and the IRA/Roth/Bank, etc is already tracked.

[audreyh1]

Quote:

Originally Posted by RunningBum Taxes are complicated and hard to predict whether you account them before hand or later. If you're only looking at your tax liability at the start of year, you aren't really doing a complete long term budget. Many can get away with this if taxes are pretty even no matter what you do, but if they aren't, you may run into surprises. I feel like I'm at least making an attempt to estimate future tax liabilities my way, rather than just hoping for the best. Just for example, at least some people here must be living primarily off money in taxable accounts, getting mostly dividends and maybe selling some investments, with small capital gains. They may be able to keep all of this at 0% tax due to being in the 15% bracket. But once they start getting a pension, SS, and tapping IRAs as the taxable account runs down, this is all regular income taxed mostly at 15%. Suddenly the tax part of their budget is likely to go way up.

Or, they just figure a bunch of the new income will go to taxes.

I guess in my case (tax deferred <10%) I don't expect the taxable accounts to run down. So with SS and RMDs coming online, I expect those additions to our income to be paying the new taxes as well as Medicare in the case of SS, so we don't see nearly as much from that additional income.

[pixelville]

Quote:

Originally Posted by mrfeh Also interesting that it was requested as percentage of net worth, instead of just investments.

Living in the Bay Area, you realize that for quite a few people their entire net worth is in their home. And their retirement plan is to sell the house at some point and move to a lower COL area. Then there are others who are lifelong renters. Hence to account for such differences it was asked as a percentage of net worth.

[gcgang]

About 20% unrealized gains, 10% IRRA.

[Danmar]

Quote:

Originally Posted by RunningBum Just for example, at least some people here must be living primarily off money in taxable accounts, getting mostly dividends and maybe selling some investments, with small capital gains. They may be able to keep all of this at 0% tax due to being in the 15% bracket. But once they start getting a pension, SS, and tapping IRAs as the taxable account runs down, this is all regular income taxed mostly at 15%. Suddenly the tax part of their budget is likely to go way up.

Agree. But, I suspect most people simply treat their added tax as an increase to expenses. On the other hand, I treat all divs and any dispositions net of tax, that is, tax is an offset to income. Works for me.