The Motley Fool Discussion Boards
Financial Planning / Tax Strategies
|Subject: Re: Taxes and UG5||Date: 10/3/1997 1:25 PM|
|Author: TMFTaxes||Number: 451 of 121803|
<<I'm trying to get a grip on what my real (after taxes and commissions) returns would be for the various strategies - particularly UG5.>>
Very Foolish, Scott. Something that needs to be done. But make sure that you compare apples to apples.
<<Let's say I start with $50,000.The monthly UG5 has a 41.8% historical average, I think. I also assume commissions eat up 2.5% and I'm taxed at 28%.>>
First of all, remember that the historical UG5 returns were computed (I believe) prior to reductions for taxes and brokerage fees. Remember that your capital gains tax rate may be very different from that of someone else. The same is true with broker fees.
<<So during the first year I make $20,900 (41.8%). Great. Commissions are $1,250 (2.5%) and I owe $5,852 in taxes for the year. So my real return is $13,798 ($20,900 - $1,250 - $5,852) which works out to 27.5%. Since commission are variable, a more useful number is 29% real return beofre commissions.>>
First of all, remember that you are able to deduct your commissions from your gains. That being the case, in your example above, your capital gains tax would be $5,502 (returns of $20,900, less commissions of $1,250 for a net gain of $19,650 X 28% = $5,502).
Second, I don't know if I would try to make this computation (in fact, I don't in real life). I compare my GROSS Foolish 4 returns (before taxes and broker fees) to the historical norm.
<<I'm curious if I am perhaps calculating something wrong. I used the formula Net Return=Gross Return - (Gross Return X Tax Rate) - Commission Rate. Am I missing something?>>
The computations appear to be correct, but they are based upon a flawed theory. Would you do the same thing with mutual fund returns? Remember that when mutual funds compute their returns, they do so BEFORE commissions and taxes. Would you then turn around and compare your AFTER tax return to the before tax returns published by the Mutual Fund in the Sunday paper? Probably no.
So you might simply compare the GROSS return to the historical return.
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