by Carolyn Rothwell on April 3, 2012

Increase your Understanding - Cost Basis in Silver Financial Planner


This post is to help increase your understanding of how the cost basis fields are used in Silver Financial Planner and Silver Online.  The cost basis input is found on the Rates section and is available for taxable assets and annuity assets.  Retirement accounts are assumed to have a 100% cost basis.  

Silver Financial Planner Cost Basis

The Basics:

The costs basis set in the rates section is tracked to determine what portion of the current asset value entered in the Asset section would be subject to capital gains tax upon withdrawal. 

  • If you set the cost basis of 100%, the program will not tax any withdrawal from principal.
  • If you set the cost basis as 0%, the withdrawal from principal is  taxed at the capital gains rate.

Example:

  • Current asset value (as entered in the asset input - aka the “principal value”) = $100,000
  • Original value of asset upon purchase = $80,000
  • Cost basis = 80,000/100,000 = 80%

This means 20% of the current asset value is due to appreciation, and has not been taxed.  If you have a stock that has appreciated 20% since you purchased it, that 20% has not yet been taxed, and will be subject to capital gains tax when you sell the stock.  This is the amount that will be subject to capital gains upon withdrawal. 

Cost basis is only tracked for taxable and annuity assets, because withdrawals from retirement accounts are assumed to be 100% taxable, and tax free account withdrawals are not taxed.

The Details:

Every year the program keeps track of the cost basis ratio to determine what portion of the withdrawal is subject to capital gains tax.

If the program takes a withdrawals for a cash flow shortage, the amount of the withdrawal that gets pulled from the principal balance is subject to capital gains tax.

Lets say a withdrawal from the $100,000 dollar account occurs year 1 of $15,000.

  • The program will first tax the withdrawal from current year growth on the asset (100,000 @ 5% return = 5,000), so $5,000 of the $15,000 not come from principal, the remaining $10,000 will have to be pulled from principal.
  • Because the cost basis is 80%, that means 20% of the principal withdrawal will be subject to capital gains.
  • $10,000 * 20% = $2,000 principle withdrawal subject to capital gains tax.
  • $2,000 x 15% capital gains rate = $300 capital gains tax due on the principal withdrawal.

For the next year, the cost basis ratio will change.  $2,000 of the original $20,000 of appreciated asset value has been pulled from the assets and taxed, the cost basis ratio would be increased to 82%, meaning 18% of the next principal withdrawal would be subject to capital gains taxation.

 

If you don't already use Silver, sign up for a 30 day free
fully functional trial to start quick and easy planning today!

Click me

 

Subscribe to Email Updates

Recent Posts

Planner Guides

Check out our free informational guides for advisors including:
  • Fundamental Financial Planning Interview Guide 
  • Making the Most out of Planning Engagements
  • Social Security: Choices Opportunities, and Decisions
  • Understanding Medicare Fundamentals

Popular Posts

Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.