Hello, I am having a very hard time to remember Tax formulas. I guess it is because I do not fully understand them. Is anyone else struggling? Any tip to help memorize them? Thank you

In my opinion there is no chance to learn them by heart. You must understand at least the basics and just do examples until it works. Effort depends on which formula your talking about. Blended taxation was a bit strange for me at the first try.

Thanks for your anwer. Ok for example the deferred Capital gain Tax formula: FVIF cg = (1+r)^n (1-tcg) + tcg Where t = tax and cg = capital gain I understand the first part of the formula (1+r)^n (1-tcg) but why do we add back “tcg” at the end of the formula please? In the Tax Deferred Account formula it is just: (1+r)^n (1-tcg) why not add back tcg there? What’s the difference between the two cases please?

Capital gain tax is just paid on the capital gain and not on the amount invested and that’s why you add back (1*)tcg (in the formula you have one unit invested which is not to be taxed).When it is about a deferred account, tax has to be paid on the whole amount, since the invested money was not taxed before. Preferable when your future tax rate is below your current tax rate.

Everybody please correct me if I am wrong.

Oh ok! Makes sense now! Thanks a lot

You add the second part because you need to account for your cost basis. If you invested 100 and now it’s worth 200, the capital gain to be taxed is only on the 100 of appreciation, not the total amount of 200.

Those are impossible to memorize, just have to understand them conceptually… think of it this way… you will pay tax one way or another on all your income now is it now or later, and if you have paid tax already then should not pay again so need to account for that…I don’t use formula but get to the same answer most of the time by just conceptually thinking about it and doing the calculations.

I would absolutely recommend memorizing the FVIF of the effective capital gains tax question. That one is not immediately intuitive. The thing is, the rest of the equations boil down from this one when factors are zeroed out.

Hey Mark666 are you by any chance in the U.S. or Canada? I only ask because one thing that helped me was relating Tax-deferred accounts and Tax-Exempt Account to domestic products i.e. for me TDA = RRSP, and TEA = TFSA (US equivalent is IRA and Roth IRA i believe. This really helped me grasp whether the dollars being invested were after tax or not, whether the returns in the investment are taxed, and whether the redemption is taxed.

With respect to gift/bequest calculations, what I find really helpful is actually drawing a timeline out. I.E If I gift this amount today I am taxed the gift tax today and then the after tax amount compounds at the recipients return rate until T.

With the formula, like a poster above, once you have a basic understanding of what they are - should become very intuitive. i.e. capital gains tax is taxed at maturity on the gains. Simplified: Proceed - Tax.

Where tax is: (t%)(Proceeds - Cost basis).

Substituting Tax with the above formula we get = Proceeds - [(t%)(Proceeds - Cost basis)]

I hope this helps! good luck