The provided answer for question 3, part B, in the EOC shows that they assume that the returns are taxed annually at each investor’s marginal rate: The 10% returns are adjusted by the tax to arrive at [1+0.10(1- 0.25 )]^5 * (1-0.30) for the FV of the amount had it been gifted to the grandchild who enjoys a 25% marginal tax rate, while the gift is taxed at 30%.
- The reader is left to deduce that the portfolio returns are taxed ANNUALLY (1+.10( 1-0.25 )^5. I wish they would specifically state that in the tax jurisdiction related to the question, all portfolio value increases are taxed ANNUALLY. If the reader lives somewhere where portfolio gains are only taxed when realized, then this assumption is not intuitive.
Anyone have insight to their reasoning?