Nominal Assets Income Calculation

I am wondering how the Nominal Assets Income figure on the Federal Taxes Report is calculated.

Our Regular Assets portfolio as input into the Monte Carlo data entry screen consists of about 50% cash and CDs, 21% large cap stock mutual funds, and 29% state specific muni bond mutual funds (although I chose Long Term Government Bonds as the portfolio component).

In the Economic Assumptions/Taxes screen, I input the 29% share for the tax free muni funds.

But the Federal Taxes report appears to be showing taxable asset income for 2015 (Nominal Assets Income) of almost twice what the actual amount will be, however it is roughly accurate if I include the estimated income from the muni bond fund.

What would be the best way to track down what is generating the erroneous income figure? I am less concerned about its impact on estimated taxes, and more concerned about correcting for over-generous discretionary spending recommendations.



dan royer's picture

I believe that this nominal asset income is derived from the amount of regular asset income you have in the Regular Assets report for any given year. If you are not yet drawing down the money in those qualified accounts then of course there's no asset income to report. I could ask for more specifics from Mike, but you should be seeing the income from Regular assets reported as nominal income in that worksheet.

The strange thing is that Regular Assets Income in the Total Income report is about right for non-muni dividends and interest, when logically it should include all income, while Nominal Assets Income, at more than two times Regular Assets Income, is about right for all dividends and interest from Regular Assets, when logically it should exclude muni bond dividends.

The Regular Assets Income on the Total Income report is in real 2015 dollars. The Nominal Assets Income on the Ferderal Taxes Report is the total income you receive from your regular Assets account in 2015.

You pay taxes on nominal income and live on real income.

For example, if you initial Regular Asset balance is $100,000, which is the balance of your accounts on 31 Dec 2014 in 2014 dollars, and your nominal rate of return is 5% and you assumed 3% inflation, then your total taxable nominal income is $5,000 = 5% * $100,000, but you real income is $2,000 = $5,000 - 3% * $100,000, since you have to convert the 2014 balance to 2015 dollars.

The nominal assets income will always be larger than the real income by the nominal RoR divided by the difference between the nominal RoR and the rate of inflation. In this example by 2.5 = 5%/(5%-3%).

That makes sense in terms of the numbers I am seeing in the reports versus the real world numbers, and also alleviates my concern about a calculation error resulting in an over-generous discretionary spending recommendation.

But if Nominal Assets Income = total income from all regular assets, it appears that it also includes income from tax free muni bonds, which appears confirmed from that my total estimated interest and dividends from all sources roughly equals the Nominal Assets Income figure in the Federal Taxes Report. If so, I wonder if it is correct to include NAI in taxable income when muni bond dividends are exempt from federal taxation? Or is it possible that NAI is calculated net of estimated muni bond income, given muni bonds' 29% share of our non-retirement assets?

The interest income on tax-free municipal bonds is not included in the nominal asset income, nor in AGI/taxable income.

You can easily see this by temporarily toggling the precent tax-free municipal bonds between zero and 100%.

Good suggestion!

I cranked the muni share of non-retirement assets from 29% down to 0%, and as predicted, NAI increased by 40%.

The NAI at 0% is still higher than actual estimated total interest and dividends from all sources, but within an acceptable margin, which alleviates my concerns re: discretionary spending recommendations.

Thanks for the explanations.

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