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6 Cards in this Set
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CFA Level 3 SS 4 Accrual taxes |
Accrual taxes-paid periodically (1+R(1-T))^N Compounding makes taxes as % of total gain Greater than stated tax rate. Tax drag$=Before tax gain-After tax gain Tax Drag %= Tax Drag$/ Total no taxes gain |
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CFA Level 3 SS 4 Accrual taxes |
Tax drag > Tax rate Increasing R increases tax drag$ Increasing R increases tax drag% Increasing time horizon increases tax drag $ and % |
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CFA level 3 ss 4 Deffered caputal gain taxes |
FVCGT=$1000((1+0.1)^2(1-0.3)+0.3))=1000((1+0.1)^2(1-0.3)+1000*(0.3) We add back taxes of invested money, as it is already taxed. Value of tax deferral is difference between after CG tax and after accrual tax. |
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CFA level 3 ss 4 Deffered caputal gain taxes |
Tax drag % in this case is always constant = Capital gain tax rate=> Tax drag% = Tax rate Investment horizon increases => tax drag is unchanged Investment return increases => tax drag unchanged Investment horizon increases => value of tax deferral increases Investment return increases => value of tax deferral increases |
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CFA level 3 ss 4 Deffered caputal gain taxes |
If cost basis is different than current market value, then we add Cost basis*CGT to the formula instead of adding market value*CGT |
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CFA level 3 ss 4 Wealth based taxes |
Wealth based taxes are based on principal and return together. Tax drag $ and % increases as horizon increases Tax drag $ increases, tax drag% decreases whena return increases Tax drag% > tax rate
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