Ben Franklin Didn't Quite Get it RightWritten by Terry Mitchell
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they shop at same grocery store and pay about same amount for groceries each week. Now, Jack gets a $20 per week pay increase and Cindy does not. However, at about that same time, Cindy finds a new grocery store where she is able to save $20 per week on her grocery bill. Assuming nothing else has changed, Cindy is now better off financially than Jack, even though she did not get a raise and he did. How can this be? It's because Jack has to pay taxes on his $20 raise but Cindy does not have to pay taxes on her $20 grocery discount. Assuming Jack is in 25% federal tax bracket (and disregarding any possible increase in his state or local taxes), he will be able to put only $15 into his piggy bank each week whereas Cindy will be able to put whole $20 a week into hers! Bottom Line: It is more blessed to receive a discount than to receive an equal amount in a pay increase!
Terry Mitchell is a software engineer, freelance writer, and trivia buff from Hopewell, VA. He also serves as a political columnist for American Daily and operates his own website - http://www.commenterry.com - on which he posts commentaries on various subjects such as politics, technology, religion, health and well-being, personal finance, and sports. His commentaries offer a unique point of view that is not often found in mainstream media.
| | Avoiding Double TaxationWritten by Peter F. Baigent CFP, CLU, CHFC, RFP.
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Now lets assume they pay same dividend on same unit value in 1991, 1992, 1993 and then you sell your shares in XYZ mutual in 1994 and receive net proceeds of $14,000. Most people I have found would report a capital gain of $4,000 on their tax return and forget that they already paid tax on four annual dividends. The capital gain is actually $1,600 ($14,000 - $10,000 + 4 x $600), less than half of what is often reported. The good news is that if this has happened to you, you can apply to have an adjustment for at least last three years of tax returns and sometimes further back than that. As you may sell a portion of your shares instead of entire position, it is necessary to keep track of these matters on a price per share basis, rather than total investment. By adding dividend per share to previous cost per share, you now have new cost per share for future redemptions. This calculation is especially helpful if you are taking a regular monthly income from a mutual fund-often referred to as systematic withdrawal plans. As there are often twelve redemptions per year, a simple record is necessary to come up with taxable portion for tax time. If you don not keep track of your cost per share you will be paying more tax than necessary. If you have other losses to offset your gains, you will be using up your losses needlessly. All of these are forms of double taxation, which result from not keeping track of reinvested dividends. If you want a form for keeping track of your cost base there is a free Form for tracking ACB, which you can download, form our web site at www.money-software.com Copyright 2004 – www.money-software.com
Peter F. Baigent CFP, CLU, CHFC, RFP. is a Past President of the Canadian Association of Financial Planners for British Columbia, a former Director of the Canadian Association of Financial Planners. He has spoken across Canada on financial planning matters and has taught courses for the Chartered Financial Consultants & Certified Financial Planners degrees. He is the founder of Money Minders Software which produces financial planning software.
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