I put this together based on some patterns I have seen. Please let me know if you see any errors and of course, please add more “rules” if you have any. Tax adjustments: 1. If given PRETAX income and asked for PRETAX returns —> NO ADJUSTMENT 2.* If given PRETAX income and asked for AFTERTAX returns —> NO ADJUSTMENT TO INCOME, MULTIPLY CALCULATED RETURN BY 1-T 3.* If given AFTERTAX income and asked for PRETAX returns —> DIVIDE INCOME BY 1-T, NO ADJUSTMENT TO CALCULATED RETURN 4. If given AFTERTAX income and asked for AFTERTAX returns —> NO ADJUSTMENT *Based on what I have seen these adjustments must be made this way because of the inflation adjustment. If there were no inflation adjustment, then you could make the tax adjustment either before or after you divided by asset base and get same answer. But because the calculated return requirement is always indexed up by inflation BEFORE adjusting for taxes, the order matters.
^ Good stuff. I was having trouble with this and planned on hammering out the rules later this week. Could someone confirm if #1-4 are correct?
Sometimes Tax Rates apply only to Salary taxation. Looks at Schweser Morning I of Bk 2. I got completely clobbered because I applied the tax rate to the portfolio income as well. If given a set of expenses e.g. living expenses , 1st child’s perpetual care expenses, 2nd child’s spending allowance , and any other, add the tax expense also. Then net out with any salary or other earning. The remaining part ( usually negative ) has to be generated by the portfolio. At this point DO NOT OVERTHINK it.Just divide by assets, add inflation and you’re done.
Also there are many scenarios where different tax rates apply to different portions of the portfolio - income at some rate, capital gains at some other rate, and so on. Figuring out all that and working those might be a real hairy task… maybe an approach might be to use the TCG* formula = [1 - sum(w*T)]/[1-sum(T)] * TCG and use that… w applies to dividend/income/others and T is the indiv tax rate for each. hope I got the above right…
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