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Author: Renaissance Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121179  
Subject: Taxes and UG5 Date: 10/2/1997 5:01 PM
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I'm trying to get a grip on what my real (after taxes and commissions) returns would be for the various strategies - particularly UG5.

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%.

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.

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?

Thanks,

Scott

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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 442 of 121179
Subject: Re: Taxes and UG5 Date: 10/2/1997 10:39 PM
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<I'm trying to get a grip on what my real (after taxes and commissions) returns would be for the various strategies - particularly UG5.

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%.

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.

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? >

No: you should be a teacher. You just demonstrated why users of the UG5 should do it inside an IRA to defer the taxes.


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Author: rayvt Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 448 of 121179
Subject: Re: Taxes and UG5 Date: 10/3/1997 12:33 PM
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<<< Renaissance: ..real (after taxes and commissions) returns for ... UG5.
is 29% real return before commissions.
JeanDavid: No: you should be a teacher. You just demonstrated why users of the UG5 should do it inside an IRA to defer the taxes. >>>
Hmmm...... Most of the Wise would _kill_ for a 29% before-tax return!
Still, though, this is an interesting point. I agree that UG5 should be used in an IRA, but don't agree (if that was your implication) that it should be used _only_ in an IRA. But we should certainly take taxes into account in deciding what to do in a non-IRA account. As a SWAG, and assuming the numbers hold for 18 month holding period as well as 12 month:
UV2 (23% return) - 20% tax = 18.4% after tax - 0.4% commissions = 18.0% net
UG5 (41% return) - 28% tax = 29.5% after tax - 2.0% commissions = 27.5% net
Formula 90 (36%) - 20% tax = 28.8% after tax - 0.4% commissions = 28.4% net
Hmmmm. Maybe I should take a harder look at Formula 90.




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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 451 of 121179
Subject: Re: Taxes and UG5 Date: 10/3/1997 1:25 PM
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<<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.

TMF Taxes
Roy


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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 453 of 121179
Subject: Re: Taxes and UG5 Date: 10/3/1997 1:34 PM
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<<No: you should be a teacher. You just demonstrated why users of the UG5 should do it inside an IRA to defer the taxes.>>

Maybe yes...maybe no. Think about somebody giving up a MAX capital gains tax rate (now at 20%), only to have this investment in a taxable IRA account on which tax will have to be paid at a HIGHER tax bracket (up to 39.6% currently).

With the reduction of the top end capital gains rate (20%), this question becomes much more complex. Each individual will really have to run some numbers and make some assumptions in order to see what is best for him or her.

There are no easy answers any more.

TMF Taxes
Roy

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 456 of 121179
Subject: Re: Taxes and UG5 Date: 10/3/1997 5:29 PM
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JeanDavid originally said...

<<No: you should be a teacher. You just demonstrated why users of the UG5 should do it inside an IRA to defer the taxes.>>

And then, in the midst of a massive brain lock, TMF Taxes mumbled...

<<Maybe yes...maybe no. Think about somebody giving up a MAX capital gains tax rate (now at 20%), only to have this investment in a taxable IRA account on which tax will have to be paid at a HIGHER tax bracket (up to 39.6% currently).>>

Jeeze...what an Idiot I am.

As we all know, the UG5 method is a short term method. So the comparison to long term holding periods is just too stupid to deal with. And, in general, I would agree with JeanDavid's original statement now that I am somewhat coherent again.

By way of an excuse, when I read UG5, my brain registered F4 (which DOES deal with long term gains). It's a pretty weak escuse, but it's the best I got.

And thanks for the flurry of e-mail that I received from many of you pointing out my confusion. I'd love to be able to tell you that this will be my last screw up, but......

TMF Taxes
Roy



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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 457 of 121179
Subject: Re: Taxes and UG5 Date: 10/3/1997 11:05 PM
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<<<No: you should be a teacher. You just demonstrated why users of the UG5 should do it inside an IRA to defer the taxes.>>

Maybe yes...maybe no. Think about somebody giving up a MAX capital gains tax rate (now at 20%), only to have this investment in a taxable IRA account on which tax will have to be paid at a HIGHER tax bracket (up to 39.6% currently).>

Recall that this is about the UG5, which can turn stocks over every month. The chance of holding a stock in the UG5 long enough to qualify for the long-term capital gains tax rates is pretty small...

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