An after-tax return is the calculated value of funds received from an investment. When money is invested in a company or financial instrument, a rate of return is estimated or calculated. This percentage value is based on the time frame of the investment and interest rates. This is the published rate. However, income taxes must be paid on investment earnings. The after-tax return is a calculation of the percentage of return achieved after all taxes were paid.
In investing, specific terms have a financial impact that must be incorporated into the investment plan. When an investor is looking at different options, the rate of return is often provided to help with the decision-making process. The higher the value, the greater the income generated. From the financial institution's perspective, this rate of return is an accurate reflection of the revenue that will be generated.
This value, however, must be adjusted into real terms. Taxation rules for investment income are quite complex, but they are designed to ensure that the government receives the appropriate share of this income. Investors must report any payments as income in their personal income tax filing. Corporations that make investments are also required to include these funds in taxable income.
The impact of taxation must be included in any investment planning, because different types of investments receive different tax treatments. Wise financial planning can help the investor to limit income tax payments and to keep the after-tax return rate as high as possible. Individual investors soon discover that all income is not equal, and that a sound financial strategy must include long-term taxation planning.
To learn more about the impact of taxes on investments, one must take the time to research income tax laws and interpretations to identify possible strategies. This work can be quite time consuming, and there is an entire industry full of investment and tax advisors who provide this service for a fee. For example, stock market trading attracts some of the highest taxation, and bonds and targeted programs often have significantly lower rates.
Depending on the taxation rules, some areas allow investors to carry forward and backward losses and gains over a specific time period. Using this technique, income peaks and valleys can be smoothed out over a period of years, resulting in an overall lower tax rate and a better after-tax return. This is the ideal scenario to increase income over time.
