Inflation, Taxes, and Stock Investment Break Even Return (includes calculator)
One of the most important calculations for an investor to perform is the breakeven return they need to compensate for the impact of inflation and taxes. If your investments return lower than this break even point, you will lose money on a post-tax, post-inflation basis.
Inflation is an increase in the price of a basket of goods and services that represent the economy as a whole. In other words, it is an upward movement in average price levels.
The impact of inflation on your investments depends on your investment choices. Generally speaking, stocks are less susceptible to the impact of inflation than bonds -which offer fixed payments that are devalued by inflation.
Get current inflation data
Stock Investment Returns and Inflation
Some stocks tend to perform better than others under inflationary pressure. Growth stocks, for example, are often seen as more vulnerable because the higher interest rates that go with inflation make their future earnings, (the earnings that drive the price of a growth stock) less potentially less valuable. It follows that Nasdaq stocks tend to be hard-hit in an inflationary economy. The stocks of companies with brand loyalty, however, (e.g. Coca-Cola) often perform better as their customers tend to tolerate a price increase.
Stock Investment Returns and Taxes
The two main ways income or profits from investing in stocks are taxed is through capital gains and dividend income tax.
A capital gain occurs when you sell a stock (or any asset) for a profit. The capital gains tax is applied to the difference between your cost (basis) for the stock and the price at which you sold it (if this difference is negative, you have a capital loss). A capital gains tax can be short-term or long-term. If you hold the stock for more than one year, you qualify for the long-term capital gains rate – the lower of the two tax
rates.
Capital gains tax rate information
If the company offers a dividend your income from this will be taxed as well. This tax is not applied if you hold the stock in a qualified retirement plan and reinvest the dividend.
Dividend tax information
The value presented to you by the calculator is the minimum you must earn on your investment. Anything less will result in a net loss for that investment.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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