How to Calculate Accrual Based Taxes on Interest and Dividends

Calculating the future value of an account that taxes interest and dividends on an annual basis requires a basic understanding of future value interest factors (FVIFs).

The formula utilized to calculate the FVIF which takes into account this method of taxation is as follows:

FVIF accrual based dividends formula

The annual taxation on dividends is reflected in the formula above by adjusting the rate of return by the quantity (1 – tax on dividends). The formula for accrual based taxes on interest is identical:

FVIF accrual based interest taxes formula

The only difference between the two formulas is the use of subscript “d” versus subscript “i”.

Let’s assume that an investment paid an annualized rate of interest of 4% for ten years, and the annual tax on interest was 15%. Plugging those values into the formula above would yield the following:

where; r = 0.04, t-interest = 15%, n = 10

If your initial investment was $1,000, you could calculate the future value in the tenth year by multiplying $1,000 by the FVIF of 1.3970:

future value

Using Excel we can construct a FVIF table that takes into account different rates of taxation on interest or dividends, the FVIF table below is constructed with a discount rate of 4%:

t-interest
year10%15%20%25%30%
11.036001.034001.032001.030001.02800
21.073301.069161.065021.060901.05678
31.111931.105511.099101.092731.08637
41.151961.143091.134281.125511.11679
51.193441.181961.170571.159271.14806
61.236401.222151.208031.194051.18021
71.280911.263701.246691.229871.21325
81.327021.306671.286581.266771.24723
91.374791.351091.327751.304771.28215
101.424291.397031.370241.343921.31805
FVIF accrual based taxes on interest table, where; r = 0.04

Obviously, the higher the rate of taxation the more it will reduce the FVIF.

The Excel model for FVIFs based on annual accrual taxation can be found here.

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