Inflation and Taxes
With the Inflation and Taxes calculation you can calculate the real rate of return after inflation and taxes.
Inflation is a sustained increase in the overall level of prices. I assume that everybody knows what taxes are...
To perform calculations that take into account the effect of inflation and/or taxes, you'll need to use the real rate of return instead of the nominal rate.
| Use the | to have an idea what the future value will be |
| real annual after-tax rate of return | after taxes |
| real annual rate of return after inflation | worth in today's money |
| real annual rate of return after inflation and taxes | after taxes and expressed in today's money |
Notes:
The Inflation and Taxes calculation uses the effective annual rate as the input rate and not the nominal annual rate: if necessary convert the nominal rate to an effective annual rate using the Effective Rates calculation first and then copy it into the effective rate field in the Inflation and Taxes calculation.
When using the calculated real annual rates of return in other calculations, make sure that the compounding frequency is set to annual compounding, as using a different compounding frequency will lead to incorrect results.
Input
| • effective annual rate |
| • marginal tax rate |
| • annual inflation rate |
Results
| • real annual after-tax rate of return |
| • real annual rate of return after inflation |
| • real annual rate of return after inflation and taxes |
Examples
| • | John invests $1,000 at a rate of 6,9 % compounded annually. His marginal tax rate is 33 %. What is the real annual rate of return on his investment after taxes?
Answer: 4.6230 % How much will be in the account after three years, supposed that there's no inflation?
Answer: After taxes, the total in John's account will be $1,145.20. |
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| • | The inflation rate is estimated to be 3 %. What will the $1.145,20 in the account be worth in today's money? Step 1: Calculate the real annual of return after inflation and taxes:
Answer: 1.5757 %. Step 2: Use this value in the single payment calculation:
Answer: In today's money John's investment will have a value of $1,048.02. Note: Another way to obtain this value is by entering the inflation rate in the nominal annual rate field and the future value in the single payment field:
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Related topics
| Nominal annual rate |
| Single Payment |