The after tax rate of return is the earnings on an investment after paying all applicable taxes. Some investors may also adjust for rate of inflation, although this is not always required. Investors use this information to determine their real returns, the actual money that ends up in their hands or accounts. It may also be necessary to calculate fees and service charges to determine the overall net earnings. Some accounting programs can perform these calculations automatically.
Tax rates on investments can vary, which can make such calculations complicated. In a simple example, an investor might be earning 10% on an investment, which is taxable at 30%. The after tax rate of return would be 7%, reflecting the earnings less the taxes. Investors can calculate this on the basis of taxes actually paid, or estimated taxes, given the nature of the investment and the typical rates. In addition, investors might have to pay service fees to their financial managers, or fees for trades, in which case the net return may be slightly lower.
Investors can use a number of tricks to maximize their earnings. Some may take advantage of loopholes in the tax code and other benefits to increase their after tax rate of return. Accountants and financial advisers may have some recommendations to help investors avoid unnecessary taxes as well. Changes in the tax code from year to year may affect performance and could be important to consider in evaluations of earnings each year.
It is possible to look at the after tax rate of return over any given period, such as a quarter, a year, or a number of years. Investors may find it helpful to compare and contrast returns between periods to gauge investment performance and determine how well they manage their tax liabilities. Some investment firms may provide this information in account statements for the benefits of their members while in other cases, people need to perform these calculations on their own.
In cases where people work with mixed investments taxed at different rates, the after tax rate of return may need to be calculated with care to come up with correct numbers. Investors can also compare and contrast investment types to determine not only which have the highest yields, but which offer the highest after tax rate of return. A balanced mix of investments is still important, but it may be possible to move funds to an assortment of investments with better rates.