11 taxes and private wealth management
in a global context
global income tax structures
tax rate structure
progressive rate structure - most
*marginal tax rate, rate on the next 1 of income
flat tax structure
special tax provision for interest income:
- an exemption for certain types
- a favorable tax rate
- an exclusion amount (limited amount)
dividend income:
exemptions / special rates / exclusions
mitigating double taxation
capital gains or losses:
long-term gains treated more favorably generally
only realized gains were taxed in most cases
income tax regimes
common progressive
heavy dividend tax
heavy interest tax
heavy capital gain
light capital gain tax
flat and light
flat and heavy
tax deferred accounts
after-tax accumulations and returns for taxable accounts
simple tax environments
blended taxing environments
accrual euivalent
types of investment accounts
accrual taxes on interest and dividends
tax drag
deferred capital gains
cost basis B
low-embedded tax liability
wealth-based taxes
FVIF=[1+r(1-t)]^n
FVIF=(1+r)^n-[(1+r)^n-1]t
=(1+r)^n(1-t)+t
return the tax of the untaxed cost
FVIF=(1+r)^n(1-t)+t-(1-B)t
=(1+r)^n(1-t)+tB
FVIF=[(1+r)*(1-t)]^n
effective annual after-tax return
not capture effects of deferred unrealized captital gains
r=r(1-pti-ptd-ptcg)
effective capital gains tax rate
T=tcg(1-pi-pd-pcg)/(1-pti-ptd-ptcg)
FVIF=(1+r)^n(1-T)+T*-(1-B)tcg
accrual equivalent after-tax return
R.AE
the tax-free return that if accrued annually produces the same after-tax accumulation as the taxable portfolio
accrual equivalent tax rate
T.AE
tax drag= taxable return - accrual equivalent return
r(1-T.AE)=R.AE
taxable accounts
tax-exempt accounts
tax-deferred accounts / TDAs
taxes and investment risk
taxes not only reduce invest returns but also absorb some investment risk
wealth management
trading behavior
proper investment management strategy remains more important than proper asset location strategy
trader
active investor
passive investor
exempt investor
asset location
planned holding period
investment style
tax regime governing
restrictions:
borrow and lend rate
borrowing costs
behavioral constraints
liquidity constraints
lending offset borrowing to achieve desired overall asset allocation
tax loss harvesting
realizing a loss to offset a gain or income
reducing the current tax obligation
reset the cost bases
increase the amount of net-of-tax money available for invest
highest-in, first-out (HIFO) tax lot accounting
holding period management
after-tax mean-variance optimization
substitute accrual equivalent returns
substitute after-tax standard deviation