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ACCOUNTING RULE - Floating Income Tax Recognition

Contributed by mm | February 14, 2003 11:58 PM PST

In order to reflect the potential tax liabilities associated with capital gain and loss of my portfolio, the following accounting rule is adopted:

1) A "Tax Liability - Floating" account is set up in MS Money

2) Periodically, by at least monthly at each month end, the following exercise will be performed to calculate the potential tax liabilities:

a. Pull total capital gain/loss using "Taxable Portfolio" view with all closed positions hidden. The "Taxable Portfolio" view includes ordinary brokerage accounts like Datek and AmeriTrade, but excluding 401(k) and Roth IRA.

b. Pull total capital gain/loss in the MS Stock Option account with all closed positions hidden.

c. The net capital gain/loss for all open positions (from step a and b) is then compared to the total amount from last month's exercise to get a month-to-month change amount

d. Multiply the month-to-month change amount by the marginal income tax rate (currently 25%) to get a net change in tax liabilities. The net change amount is then entered into the "Tax Liability - Floating" account.

Note:

Stock option gains are subject to FICA tax. However, Social Security Tax, which represents majority of the FICA tax, is capped at $87,000 (for 2003, adjusted to CPI annually), which is below my salary earnings, so incremental stock option gain does not bring incremental social security tax liabilities.

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