# before tax return. after adding inflation

I just did question 5 of the EOC for Asset Allocation

And it calculated the before tax nominal return after it had added inflation.

Surely inflation (+1.5%) should be added afterwards?

e.g 4.12 / (1 - 0.30) = 5.89% + 1.5% instead of

4.12 + 1.5 / (1 - 0.30)

Thanks

Inflation is always added last in equations and first deducted in reversal equation. LIFO basis. This another approach is outdated.

Nominal return charge with tax therefore (real after tax+inflation)/1-tax=nominal before tax return.

Yepp. Sorry, currently am doing some old AM sessions and that’s how it was calculated before.

With all due respect, this is completely wrong.

You have to read the vignette to determine whether you add inflation before grossing up for taxes or after. _ It can be either one _; the vignette will tell you which.

A couple of examples:

2009

. . . a tax rate of 20% [applies] to the . . . withdrawals from the investment account.

Here, only the withdrawals are taxable; the inflation component will remain in the account, untaxed. Increase the return for taxes, then add inflation.

2013

The tax rate on ordinary income and all investment returns is 30%.

Here, all returns, whether for living expenses or for inflation, are taxable. Add inflation, then increase the sum for taxes.

With all due respect I wrote I was wrong.

See 2009 AM. First return calculation was in the manner I described. Since I was doing it at the moment of post, this confused me.

Cheers!

[quote=“S2000magician”]

Since you are willing to help and that’s appreciated. Could you explain me why on same 2009 individual vignette says all withdrawals are taxed and regarding children 200K scholarship is taxed thus in gro amount is equal 250K and in same vignette 100K withdrawal for mortgage payment wasn’t taxed at all? I think it was 2009 AM, am not able to check now. Thanks in advance.

[quote=“Flashback”]

Yes it’s the 2009 exam. I believe it’s the subtlety of the wording in the case. It says “pay off their mortgage and associated taxes” and it states the specific withdrawal amount. If they stated the actual remaining mortgage balance then we’d need to gross it up to account for the taxes.

Maybe the author of that question was fired due to Type 1 error:)

#dyslexia

S2000magician has had to explain this calculation like 6 times this yr already lol. It always comes down whether or not the inflation component is taxable or not. Read the vignette but I’m willing to bet inflation is added then the nominal is adjusted for the tax.

[quote=“Flashback”]

As JayWill mentioned, the vignette doesn’t say that the mortgage balance is (or, rather, will be) CAD100,000 nor that the tuition will be CAD200,000; all it says is that those are the amounts they’ll withdraw to cover those payments. The sentence I cited – in full, it’s, “Briscoe expects a tax rate of 20% to apply to the Tracys’ withdrawals from the investment account.” – makes it clear that you are to treat all withdrawals and only withdrawals as taxable.

Dear all

thank you. I will check once again. The fact is that I had a problem with return calculation only on this question. Not in any 2016 - 2010. Something must be wrong with this one and is not written in plain language.

I found tutorial from Finquiz.com especially for this one. Now, I see what the problem was, tax deferred taxation explained by term withdrawals only taxation .

just did a question 1 of the 2009 exam.

They adjust the expense to make it pre-tax, then calculate the return required and add inflation after.

This is contradictory of the above as it is adjusting the after tax return first to make it pre tax. then adding inflation