How do I account for unrealized capital gains?
Hello,
I have three questions:
A: How do I account for current unrealized gains in my taxable accounts? eg. my taxable stock portfolio is $100,000. Of this, $20,000 is in unrealized capital gains. I don't intend to sell any stock until needed after retirement.
The amount of unrealized gains have a tax impact at the time of withdrawal so how is that accounted for?
From a previous post, I don't think the "Unrealized capital gains/losses on existing financial assets" is the right field - or is it?
B: I want to make sure I understand the field "Share of regular capital income received... or dividends" correctly. It is the percentage of my realized capital gains (including stock, bond, mutual fund distributions) and stock dividends (including stock, bond, mutual fund distributions) in my REGULAR Assets, that is taxed at the "long term rate".
C. How do I account for tax-exempt bonds? I have NJ state bonds that are exempt from federal and state taxes.
Thank you.
c.
RSS
Hello,
I have three questions:
A: How do I account for current unrealized gains in my taxable accounts? eg. my taxable stock portfolio is $100,000. Of this, $20,000 is in unrealized capital gains. I don't intend to sell any stock until needed after retirement.
GO TO THE TAX/BENEFIT ASSUMPTIONS SCREEN AND TELL THE PROGRAM THAT 20 PERCENT (YOU MAY WANT TO USE AN EVEN HIGHER PERCENTAGE)
OF YOUR REGULAR ASSET INCOME WILL BE RECEIVED AS DIVIDENDS OR LONG-TERM GAINS.
The amount of unrealized gains have a tax impact at the time of withdrawal so how is that accounted for?
YOU SHOULD ENTER UNREALIZED GAINS IN THE TAX/BENEFIT ASSUMPTIONS SCREEN. WE ASSUME THESE GAINS ARE REALIZED GRADUALLY THROUGH TIME, WITH AN EQUAL AMOUNT BEING REALIZED EACH YEAR.
From a previous post, I don't think the "Unrealized capital gains/losses on existing financial assets" is the right field - or is it?
IT'S THE RIGHT FIELD. BE AWARE THAT WE ASSUME ALL GAINS ARE REALIZED ON AN ANNUAL BASIS. WE NEED TO MAKE THIS ASSUMPTION BECAUSE SPECIFYING WHEN YOU ARE GOING TO REALIZE THE GAINS ON YOUR REGULAR ASSETS WILL PRECLUDE USING THEM FOR CONSUMPTION SMOOTHING.
B: I want to make sure I understand the field "Share of regular capital income received... or dividends" correctly. It is the percentage of my realized capital gains (including stock, bond, mutual fund distributions) and stock dividends (including stock, bond, mutual fund distributions) in my REGULAR Assets, that is taxed at the "long term rate".
IT'S THE PERCENTAGE OF YOUR REGULAR CAPITAL INCOME (WE ASSUME ALL GAINS ARE REALIZED ANNUALLY) THAT'S COMING IN THE FORM OF CAPITAL GAINS AND DIVIDENDS.
C. How do I account for tax-exempt bonds? I have NJ state bonds that are exempt from federal and state taxes.
IN A FEW WEEKS WE'LL HAVE AN UPDATE THAT WILL PERMIT YOU TO TELL US THE SHARE OF YOUR CAPITAL INCOME THAT IS COMING FROM TAX-EXEMPT BONDS.
Thank you.
c.
In the post above you state ESPlanner assumes all gains are realized on an annual basis. For individuals with large taxable accounts (which most of our clients do) this method greatly overstates the taxes therefore reducing the affordable consumption.
1. It appears the taxes would be overstated throughout the plan. Is this accurate? If not, why?
2. How do you propose we modify the plan to get a more accurate tax calculation?
1. Yes and no. Clearly, given the assumption, the yearly taxes will be higher and the consumption lower. But that's not necessarily a bad thing if you assume higher marginal tax rates in the future. If you "pay as you go", you leave money on the table which can be used to pay the taxes when you DO sell assets so the overall tax hit wouldn't be a high in the future. Point being is that sooner or later those taxes will have to be paid so you might as well save up for it now.
2. If you know that the capital gains are x%/year and that the capital increases by y%/year (which you do in the basic run), can't you just add a non-taxable special receipt for x% * y% to offset the "extra" taxes? This isn't necessarily a good idea BTW because ESPlanner will draw on regular assets as needed (which is why we use the "pay as you go" model of capital gains taxation), so your tax model will, probably, be even less "accurate" than the one we use.
We also have a "conservative" position that we can take here and "pay as you go" is about the most conservative one possible.
Now you could argue that we should do something a little closer to reality, i.e., accumulate capital gains, only charge capital gains when savings is reduced, etc. but that's a nightmare internally so it's very unlikely to happen unless we get the funds/time to redesign the tax routines completely.
Best,
Dick Munroe