Calculating Income

[GenXguy]

I keep it simple.


I use MAGI as is used for determining ACA PCT and CSR.

 

[Dash man]

I just make up a number. I don't use numbers from tax forms because I set my income there to whatever amount I think will work out for me in the line run. Using dividends and interest also doesn't make sense to me because if I'm a growth investor, I have no dividends, but at least as good prospects for portfolio growth. Take 3 or 4 percent of your portfolio as a starting point and alter as needed.

I just use my planned expenses, since that is the total amount of interest, dividends (taxable) and principle withdrawals I’ll be making. I just check each year to make sure my plan is on target and adjust if needed.

 

[HI Bill]

For purposes of loan applications, I would use the amount received from all sources, including principal on taxable investments. They want to verify your annual spending to see if you qualify for the loan. They don’t care what % is taxable, the source of the income, or what the IRS considers taxable income, IMHO.

 

[Jerry1]

Sorry, this a bit off topic, but can you tell me how much of a rebate you received for taking the financing and did you need to keep the finiancing for a period of time (like 3 months) before paying it off. We are about to start the car buying experience and I'm trying to get my plan in place.

We got $1,500 for taking the financing. Word of caution. The dealer told me I had to keep the financing for four months. That was BS but I didn’t find that out until it was too late. The four months is how long you have to keep it for the dealer to get their cut. As far as the financing company is concerned, you could pay it off the next day. That issue cost me about half the rebate. Still worth it, but could have got more. Had I known, I probably would have paid it off by the end of the first month.

 

[bingybear]

An idle question on a foggy Saturday morning:

Not counting SS, rental income or anything other than your portfolio, how do you count your income?

Example: If your portfolio made $400K and your SWR is $120K but you only paid taxes on $30K what would you consider your income?

I think it might depend on who's asking; that is, when it's time to do a new car lease, I'd use the total portfolio number (if larger that year) but on a practical day-to-day level I consider my income to be my SWR, then there are instances where I might answer on what I paid taxes on.

Again, limiting it to portfolio only. Just curious.

When I first read this I was thinking your conditions were over limiting on what I would think of as income. Later you noted this was for qualifying for a lease.

Others noted they use taxable income. This provides less joy as it does not make sense if one is doing roth conversions to the top of the (MFJ) 24% bracket. It is difficult to view moving from a TIRA to a RIRA as income.

I don't think much about income as our plans are on hold while we help an aging parent.

 

[GravitySucks]

I live mostly off my IRA so anything I take out is considered income by the tax man. It's also the number I use on credit applications.
I'm reality my income is just the SS, dividends, interest and realized gains though.

 

[Golden sunsets]

We got $1,500 for taking the financing. Word of caution. The dealer told me I had to keep the financing for four months. That was BS but I didn’t find that out until it was too late. The four months is how long you have to keep it for the dealer to get their cut. As far as the financing company is concerned, you could pay it off the next day. That issue cost me about half the rebate. Still worth it, but could have got more. Had I known, I probably would have paid it off by the end of the first month.

Wow. Thanks for responding. Do you mean you could have gotten more than $1,500, or if you'd kept it for 4 months you would have gotten the full $1,500?

 

[donheff]

This sounds like the net worth discussions we have had. People make up an approach depending on what they want to keep track of. IRS is the only outfit that has a definition of income that counts -- watch that one or it may bite you in the a**.

Based on how I understood the original question, I consider my "income" from the portfolio to be the amount I pull out from portfolio accounts and actually spend during the course of the year. I use this figure divided by total portfolio at the beginning of the year to calculate actual SWR for the year as percent of portfolio. I contrast that with planned SWR which is an ongoing figure calculated several years ago that I use for planning. Any difference between planned SWR and actual SWR is retained in the portfolio in a psuedo fund available for any damn thing I want it for (e.g. this year I tapped it to help DD with a mortgage down payment). That psuedo fund is not considered part of my portfolio for calculating planned SWR.

I calculate my % annual growth two ways. First by simply dividing the end of year total holdings minus the beginning of the year total holdings (including my psuedo account) by the beginning of the year holdings. This is just to see how things stand year after year after draw down. And second I do the above but add back actual funds spent (i.e. actual SWR) in the end of year figure so I can roughly compare my portfolio performance to my benchmark which is VTTVX. In this later case I am looking at how I did that year including the SWR amount compared to how a hypothetical portfolio of the same size would have done in Vanguard's target retirement 2025.

 

[marko]

OP here.
My original question was more about how you mentally tally your portfolio income and growth more than a practical use or definition.

What I was getting at was, if your portfolio gained $X do you consider that 'income' or just growth, regardless of how the IRS views it.

True, at lease-car time (the only time I'm asked) I fudge in some number but quietly wonder if I'm over or understating--again, not that anyone seems to check. For my usual calculations and day-to-day, I use my withdrawals + SS + other incomes but the question was really about how other view their portfolio growth.

I believe "Jerry1" best answered the envelope of the question in post #2.

 

[pb4uski]

I think this answer is simpler and closer to what I was thinking.

Every three years I'm asked about my income on a car lease application and I'm always thinking twice about what to put down (not that anyone seems to check).

On car lease application, I would use the income from my tax return even though it includes totally discretionary tIRA withdrawals and Roth conversions, but that is what the IRS considers as income so I think it is defensible.

So from the portfolio, that would mean interest, dividends and realized capital gains.

 

[MarieIG]

OP here.
My original question was more about how you mentally tally your portfolio income and growth more than a practical use or definition.

What I was getting at was, if your portfolio gained $X do you consider that 'income' or just growth, regardless of how the IRS views it.

True, at lease-car time (the only time I'm asked) I fudge in some number but quietly wonder if I'm over or understating--again, not that anyone seems to check. For my usual calculations and day-to-day, I use my withdrawals + SS + other incomes but the question was really about how other view their portfolio growth.

I believe "Jerry1" best answered the envelope of the question in post #2.

No, I do not.

 

[Jerry1]

Wow. Thanks for responding. Do you mean you could have gotten more than $1,500, or if you'd kept it for 4 months you would have gotten the full $1,500?

No, I got the $1,500 period. The offset was that I paid interest for four months. Which, had I known the truth, I could have mostly avoided. Four months of interest was about $700, so it cut my savings in half.

 

[GenXguy]

What I was getting at was, if your portfolio gained $X do you consider that 'income' or just growth, regardless of how the IRS views it.

Absolutely not, I only consider income that is truly income as determined by IRS. In the case of your question, as it applies to my brokerage account, I would consider the dividends and capital gains distributions to be income as well as any "realized" capital gains, if there were any. For my 457 account, it's only income when I take distributions.

It is completely irrelevant how much of it I actually spend, if any.

 

[Offgrid Organic Farmer]

... whenver I am asked for income on an application of some sort I use what is shown as total income on our tax return... so in our case it includes interest, dividends, my pension, realized gains/(losses) and IRA withdrawals. And it will include 85% of SS once SS starts.

Same here.

Use your 1040.

I have pension income, and I have rental income [we use a Schedule E to subtract all business expenses, as required by law], and I have farm income [we use a Schedule F to subtract all business expenses, as required by law]. And that is my income.

I do not have SS income yet, not old enough. I have only been retired for 18 years.

 

[imoldernu]

I got lost on this one...

Our income more than balances our outgo. No taxes since 1998.

In my terms, income comes from:
Social Security
IBond Interest, (not yet taxed)
Annnuity
Sale of our Florida property

So far, capital is intact, and not threatened.

 

[marko]

I got lost on this one...

Our income more than balances our outgo. No taxes since 1998.

So, this sort of illustrates my OP. There are people who's reportable income is very low despite having a relatively high income.

In the (in your case, unlikely) event that you were applying for a loan/lease/rental etc what would you claim as your income?

One could envision a situation where one could be taking SS while withdrawing $100K in after-tax cash each year, yet filing a $15K SS 'income' to the IRS. In this case, I'd say my income was $115K.

 

[pb4uski]

.... One could envision a situation where one could be taking SS while withdrawing $100K in after-tax cash each year, yet filing a $15K SS 'income' to the IRS. In this case, I'd say my income was $115K.

No! If you take $20 out of your wallet and spend it is that income? I presume that you would say no.

So if you take $100k out of your after-tax savings account and spend it is that income? No! For the same reason.

So if you take $100k out of your brokerage account and spend it is that income? No! For the same reason.

What you are advocating doesn't make sense.

 

[RunningBum]

I'd put $115K in marko's case. I'm assuming what they are looking for is my ability to pay. I'm not going to get hung up using a conventional term that doesn't really apply in these type of situations. What kind of house/apt will you be able to rent for $15K? How about $115K? Which one are you likely applying for?

 

[Cobra9777]

I agree with RunningBum and marko. You have to think beyond GAAP and tax definitions... and actually answer the question that's being asked. Being defensible and verifiable does not make it meaningful in every context.

 

[pb4uski]

You guys seem to be confusing spending with income.

I think we would agree that one possible definition of (net) income is change in net worth... in marko's example his net worth decreases by $100k... $x beginning net worth + $15k SS - $115k spending = $x - $100k ending net worth.... proving that $115k of "income" makes no sense at all.

If they ask for income and he puts down $115k then he has falsified his application... if they ask him for details on his $115k of income his credibility will crater. He should put down the $15k and explain that he is also living off of savings.

 

[RobbieB]

Yeah. Income (IRS taxable) is way different than what you spend or what you get from the broker.

 

[marko]

No! If you take $20 out of your wallet and spend it is that income? I presume that you would say no.

So if you take $100k out of your after-tax savings account and spend it is that income? No! For the same reason.

So if you take $100k out of your brokerage account and spend it is that income? No! For the same reason.

What you are advocating doesn't make sense.

Well, I'd hate to try and lease a new Mercedes with a $15k annual income!

But what your saying is that if I take $100k out of my after tax account it is not income, but if I take it out of my pre tax account it is? To me we're getting into semantics, no? As we've seen, not all income is taxable.

Having said that, "not making sense" is about the 19th time I've been accused of such just today, so, all good.

 

[pb4uski]

Well, I'd hate to try and lease a new Mercedes with a $15k annual income!

But what your saying is that if I take $100k out of my after tax account it is not income, but if I take it out of my pre tax account it is? To me we're getting into semantics, no?

Having said that, "not making sense" is about the 19th time I've been accused of such just today, so, all good.

Perhaps it will make leasing that Mercedes more difficult but that inconvenience doesn't magically change after-tax savings withdrawals into income! If you take $100k our of your pre-tax account you can legitimately claim it as being income because an authority, the IRS, says that it is income (since it has never been taxed). Oddly, even if you just do Roth conversion, effectively moving it from one pocket to another, you could defend it as being income because the IRS says that it is. I agree it is semantics to a large degree but you will be asked to sign that whatever your report as your income to the best of your knowledge and belief and I think it would be hard to defend the after-tax savings withdrawal as income.... with the others you can just claim that you are using income as reported on your tax return and you can provide the tax return as proof.

Well, look at it this way.... say someone has $15k of SS and a $1m after-tax stock portfolio that throws off $20k a year in dividends.... their income is $35k.... but I'm guessing that the Mercedes dealer will find a way to make the deal once you explain the situation and your ability to make the payments.

OTOH, let's say that you claim $115k of income and they request some details... then what are you going to do? Also, I assume that you'll be asked to sign the application with $115k of income as being true to the best of your knowledge and belief or something like that... are you comfortable doing that? What are the consquences if they find out and in their view your income is really only $15k?

 

[misanman]

I don't see how withdrawing money from any account is income.

 

[RunningBum]

You guys seem to be confusing spending with income.

I think we would agree that one possible definition of (net) income is change in net worth... in marko's example his net worth decreases by $100k... $x beginning net worth + $15k SS - $115k spending = $x - $100k ending net worth.... proving that $115k of "income" makes no sense at all.

If they ask for income and he puts down $115k then he has falsified his application... if they ask him for details on his $115k of income his credibility will crater. He should put down the $15k and explain that he is also living off of savings.

You won't get that chance to explain if you write down $15K. I'd rather be conditionally accepted and then justify my ability to pay based on $15K income and $100K withdrawal than be outright rejected for putting down $15K. My $115K is as good as $115K salary income--better, really, since I'm not paying tax on that return of capital. If you think my credibility would be shot after that explanation, do you really believe they would spend a second more after seeing $15K income?

You're hung up on your background of precise definitions and not answering what they are really looking for. We're not confusing anything. We're using a practical interpretation in a real life situation.