Regular assets (non-retirement assets) typically generate earnings year over year as well as just grow in market value. Together, we can refer to this as total return. For tax purposes, the total return on regular assets can be attributed to one of three sources as shown in Settings and Assumptions > Taxes > page : 

        Municipal Bonds (no tax consequence)

  1. Capital Gains and Qualified Dividends (taxed as long-term capital gains)
  2. Unrealized Gains, (aka, market appreciation)
  3. Ordinary Interest and Non-Qualified Dividends

In other words, 100% of one's total return can be attributed to some combination of the three tax sources above plus municipal bonds if any. 

The default setting is to treat 100% of the total return for the current and all future years as ordinary interest or non-qualified dividends, #3 above. That would be the most tax intense setting because ordinary interest is taxed at a higher rate than capital gains or qualified dividends. 

However, if you indicate that 40% of your total return was from distributed capital gains or qualified dividends, #1, you would notice that #3, changes to 60% to account for 100% of the total return.  If you indicate that 100% of your total return is attributable to #1, capital gains (and or #2), this would be the most tax-friendly setting. It might be educative to run the plan using both extremes to see how much difference it makes in one's discretionary spending.  

Unrealized Gains

But not all of the total return in any given year is always from distributed gains such as ordinary interest or capital gains/qualified dividends alone. Often the market value of our stocks, bonds, or mutual funds go up. In other words, we have a good year in the market and this also is what we refer to as part of--or often even most of--our total return. But market appreciation is not distributed. That is, it is not reported to you with a 1099- form. But that doesn't mean you will not eventually pay taxes on that market gain. This kind of gain is "unrealized gain," #2 above, and it can accrue year over year. Your brokerage account keeps track of this undistributed, unrealized gain and as you sell these assets, they are taxed as capital gains. In other words, the unrealized gains are realized. 

MaxiFi views withdrawals from regular assets as an opportunity to generate a capital gain. These withdraws will trigger capital gains tax and MaxiFi will realize these capital gains along with any yet unrealized capital gains on a pro-rata basis when they are withdrawn from the regular asset account. Your Annual Saving and Withdrawal Report shows the pattern of annual saving and withdrawal over the life of your model. We exempt death bequests from capital gains.

Any past unrealized gains (or losses) carried forward from previous years into the current year are entered as a dollar amount in the unrealized gains field on the Settings > Taxes > form. 



With this information, MaxiFi each year going forwards updates both unrealized capital gains (carryover losses if negative) and the Regular Asset balance at the end of the year based on the annual return. Positive returns that include capital gains increase unrealized capital gains or decrease carryover losses. Negative returns decrease unrealized capital gains or increase carryover losses. When MaxiFi generates a withdrawal from the Regular Asset account and there are unrealized gains, then the pro-rata share of capital gains realized in that withdrawal is determined based on the updated end of year balances and the amount of the withdrawal. Carryover losses are used to offset capital gains and to take up to a $3,000 loss per year. MaxiFi now passes bequests to heirs with no reduction due to capital gains taxation. That is, it now incorporates what's known as "step up in basis."

(The capital gains on real estate property are realized when you sell the property.)

So what percentage settings should I use on this page? 

If your total return each year is typically attributable to ordinary interest, say all of your regular assets are in CDs and money market funds or cash, then the default setting of 100% ordinary interest, #3, is appropriate. 

If your regular assets are in a brokerage account invested in stocks, bonds, mutual funds, CDs, Treasuries, etc. then your typical total return is likely to be attributable to some distributed capital gains or qualified dividends as well as market gains. If that's the case, you might, for example use settings like this: 

  1. Capital Gains and Qualified Dividends: 15%
  2. Unrealized Gains: 60% 
  3. Ordinary Interest and Non-Qualified Dividends: 25% 

This arrangement above might be thought of as a middle ground between all capital gains vs all ordinary interest income. The higher the percentage of #3, the more cautious or tax intensive the attribution becomes. You might prefer to overstate your taxes rather than understate them. 


NOTES:

  • It's nearly impossible to know the future and how your regular assets will be invested and how they will be taxed for all future years. 
  • Non-qualified dividends (more common than qualified) are taxed as ordinary income. 
  • Unrealized gains accrue in the background and carried forward from previous years. They are realized proportionately over the life of the plan as you withdraw from regular assets (see Savings report) which triggers a realization of some portion of the total unrealized gains you have.