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:

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:

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:

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:

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
year	10%	15%	20%	25%	30%
1	1.03600	1.03400	1.03200	1.03000	1.02800
2	1.07330	1.06916	1.06502	1.06090	1.05678
3	1.11193	1.10551	1.09910	1.09273	1.08637
4	1.15196	1.14309	1.13428	1.12551	1.11679
5	1.19344	1.18196	1.17057	1.15927	1.14806
6	1.23640	1.22215	1.20803	1.19405	1.18021
7	1.28091	1.26370	1.24669	1.22987	1.21325
8	1.32702	1.30667	1.28658	1.26677	1.24723
9	1.37479	1.35109	1.32775	1.30477	1.28215
10	1.42429	1.39703	1.37024	1.34392	1.31805

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.