While gathering information for your tax return, you’ll accumulate a great deal of information about your investments, including interest income, dividend income, and realized capital gains. It’s a good time to calculate your overall and after-tax rates of return on your investments.
Conceptually, your total return on an investment equals the change in market value plus any dividends, interest, or capital gains, divided by the beginning market value. Practically speaking, however, total return can be difficult to calculate, especially if you invested additional money or took distributions during the year. Then, you may need the help of a computer to calculate your total return precisely.
Once you know your total return, calculate your after-tax return. From your dividend, interest, and short-term capital gain income, deduct the amount paid in taxes at your marginal tax rate. From your long-term capital gains, deduct capital gains taxes paid. You can then calculate your after-tax return.
If there’s a significant difference between your total return and your after-tax return, you may want to reevaluate your investment strategy to make it more tax efficient. Emphasizing investments that generate capital gains or placing income-generating investments in your tax-deferred accounts are just two strategies you may want to consider.