Taxes and Inflation Calculator: How Much of Your Investment Return Do You Keep?

IN THIS ARTICLE

• Tax and Inflation Calculator
• Reading Your Results
• Portfolio Example
• Break-Even Yields
• Levers to Discuss
• Bottom Line

The number on your statement shows growth before taxes, but taxes take a portion of that return each year, and inflation then reduces what the remaining dollars can buy. Use the calculator below to see the impact of taxes and inflation on your own numbers.

Calculate the Impact of Taxes and Inflation on Your Returns

When you enter your assumptions into the calculator, you'll see three results:

• What your investment grows to before taxes
• What remains after taxes
• What those dollars are worth in today's terms after inflation

Because the calculator applies one combined tax rate to your full return each year, use your marginal rate rather than your average rate for the most accurate picture.

How to Read Your Calculator Results

As we discussed, the calculator shows three key figures. Here is a breakdown of what each means:

• Growth before tax is what your investment earns before any taxes are taken out.
• After-tax value is what remains after taxes are applied to your return each year.
• Inflation-adjusted purchasing power shows what those after-tax dollars can actually buy in today's terms.

The tool also reports a annualized return, which is the average yearly growth after taxes and inflation. This number helps you see the real rate of return you may be keeping over time.

The gap between your before-tax growth and your inflation-adjusted purchasing power is what economists call tax drag, or the amount of growth that goes to taxes each year and then stops compounding. Over time, this drag can significantly reduce what your portfolio is worth in real terms. For a deeper look at this concept, see Beyond Your Statement: Real Return Explained.

How Taxes and Inflation Can Shrink a $2 Million Portfolio

Hypothetical example for illustration only. Simplified and not representative of any investor or investment.

Consider a $2 million taxable portfolio with a 7% annual return* held for 10 years with 3% inflation and a 23.8% tax rate on the return each year.

The 23.8% rate combines the 20% long-term capital gains rate and the 3.8% net investment income tax, federal only.¹ You can check this example yourself by entering 7%, 23.8% federal, 0% state, and 3% in the calculator, then multiplying the tool's $10,000 results by 200.

First, the good news.

Before taxes, the portfolio grows to about $3,934,000 over 10 years. That is nearly $2 million in growth on the original $2 million.

Now, the bad news.

After taxes, the portfolio is worth about $3,363,000. Taxes reduced the growth by roughly $571,000. After adjusting for 3% inflation, the purchasing power of that after-tax value drops to about $2,502,000 in today's dollars. In real terms, the portfolio gained only about $502,000 in spending power over a decade.

This example may overstate the drag for buy-and-hold investors who defer capital gains, and it may understate the drag for interest-heavy portfolios where taxes are paid annually. The key takeaway is that the gap between your stated return and what you keep can be larger than you expect.

What Return Do You Need to Beat Taxes and Inflation?

A break-even yield is the return an investment must earn before taxes to hold its purchasing power after taxes and inflation. The formula is simple: required yield equals inflation divided by one minus your tax rate.

The higher your tax rate, the more return you may need just to stay even. The table below shows break-even yields at three federal long-term capital gains rates, using 3% inflation to match the $2 million example and 0.6% to reflect the latest monthly CPI reading.

At the 23.8% rate, you need nearly 4% before taxes just to maintain purchasing power at 3% inflation. If inflation rises, the break-even yield rises with it.

Levers to Discuss With Your Advisor

Several strategies may help reduce the gap between your stated return and what you keep. These are topics to discuss with your advisor, not recommendations.

• Asset location holds investments that generate higher taxes in accounts that defer or mitigate tax, while keeping tax-efficient investments in taxable accounts.
• Tax-loss harvesting sells investments at a loss to offset gains and reduce your tax bill for the year.
• Holding periods matter because long-term gains may be taxed at up to 20%, compared with up to 37% for short-term gains.²
• Municipal bonds in taxable accounts may provide interest that is exempt from federal income tax, though the interest may be subject to state tax or the alternative minimum tax.
• Roth conversions** and withdrawal sequencing can help manage when you pay taxes. The years between retirement and required minimum distributions may offer a planning window. RMDs generally begin at age 73 or 75, depending on your birth year.

For a broader look at strategies that may reduce your tax burden, see Tax-Efficient Investing for High-Income Earners. If you are approaching retirement and want guidance around year-end financial decisions, Year-End Tax Planning: Fall Moves That Shape Your Tax Bill covers Roth conversions and other timing decisions.

This window may allow you to convert traditional retirement assets to a Roth IRA at lower tax rates before RMDs begin. To explore whether a conversion makes sense for your situation, try our Roth IRA Conversion Calculator.

Bottom Line

Your return is not what you keep. At higher tax brackets, you may need a higher return just to hold purchasing power. Real, after-tax value is what you may be able to spend or pass on. Planning around what is left after taxes and inflation may help you make clearer decisions with your advisor.