What Is Annualized Income?

Annualized income is an estimate of the sum of money that an individual or a business generates over a year’s time. Annualized income is calculated with less than one year’s worth of data, so it is only an approximation of total income for the year. Annualized income figures can be helpful for creating budgets and making estimated income tax payments.

Understanding Annualized Income

Annualized income can be calculated by multiplying the earned income figure by the ratio of the number of months in a year divided by the number of months for which income data is available. If, for example, a consultant earned $10,000 in January, $12,000 in February, $9,000 in March and $13,000 in April, the earned income figure for those four months totals $44,000. To annualize the consultant’s income, multiply $44,000 by 12/4 to equal $132,000.

How Estimated Tax Payments Work

Taxpayers pay annual tax liabilities through tax withholdings and by making estimated tax payments each quarter. There are many sources of income that are not subject to tax withholding. Income from self-employment, interest and dividend income and capital gains are not subject to tax withholdings, along with alimony and some other sources of income that may be reported to a taxpayer on Form 1099. To avoid a penalty for tax underpayment, the total tax withholdings and estimated tax payments must equal to the lesser of 90% of the tax owed for the current year or the full tax owed the previous year.

Examples of Annualized Income That Fluctuates

Computing estimated tax payments is difficult if the taxpayer’s income sources fluctuate during the year. Many self-employed people generate income that varies greatly from one month to the next. Assume, for example, that a self-employed salesperson earns $25,000 during the first quarter and $50,000 in the second quarter of the year. The higher income in the second quarter indicates a higher total level of income for the year, and the first quarter’s estimated tax payment is based on a lower level of income. As a result, the salesperson may be assessed an underpayment penalty for the first quarter.

Factoring in the Annualized Income Installment Method

To avoid the underpayment penalties due to fluctuating income, the IRS Form 2210 allows the taxpayer to annualize income for a particular quarter and compute the estimated tax payments based on that amount. Schedule AI of Form 2210 provides a column for each quarterly period, and the taxpayer annualizes the income for that period and computes an estimated tax payment based on that estimate. Using the salesperson example, Form 2210 allows the taxpayer to annualize the $25,000 first quarter income separately from the $50,000 second quarter income.

What Is the After-Tax Real Rate of Return?

The after-tax real rate of return is the actual financial benefit of an investment after accounting for the effects of inflation and taxes. It is a more accurate measure of an investor’s net earnings after income taxes have been paid and the rate of inflation has been adjusted for. Both of these factors must be accounted for because they impact the gains an investor receives. This can be contrasted with the gross rate of return and the nominal rate of return of an investment.

Understanding the After-Tax Real Rate of Return

Over the course of a year, an investor might earn a nominal rate of return of 12% on his stock investment, but the real rate of return, the money he gets to put in his pocket at the end of the day, will be less than 12%. Inflation might have been 3% for the year, knocking his real rate of return down to 9%. And since he sold his stock at a profit, he will have to pay taxes on those profits, taking another, say 2%, off his return, for an after-tax real rate of return of 7%.

The commission he paid to buy and sell the stock also diminishes his return. Thus, in order to truly grow their nest eggs over time, investors must focus on the after-tax real rate of return, not the nominal return.

The after-tax real rate of return is a more accurate measure of investment earnings and usually differs significantly from an investment’s nominal (gross) rate of return, or its return before fees, inflation, and taxes. However, investments in tax-advantaged securities, such as municipal bonds and inflation-protected securities, such as Treasury inflation protected securities (TIPS), as well as investments held in tax-advantaged accounts, such as Roth IRAs, will show less discrepancy between nominal returns and after-tax real rates of return.

Example of the After-Tax Real Rate of Return

Let’s be more specific about how the after-tax real rate of return is determined. The return is calculated first of all by determining the after-tax return before inflation, which is calculated as Nominal Return x (1 – tax rate). For example, consider an investor whose nominal return on his equity investment is 17% and his applicable tax rate is 15%. His after-tax return is, therefore:
$0.17 \times (1 – 0.15) = 0.1445 = 14.45\%$0.17×(1−0.15)=0.1445=14.45%

Let’s assume that the inflation rate during this period is 2.5%. To calculate the real rate of return after tax, divide 1 plus the after-tax return by 1 plus the inflation rate, then subtract 1. Dividing by inflation reflects the fact that a dollar in hand today is worth more than a dollar in hand tomorrow. In other words, future dollars have less purchasing power than today’s dollars.

Following our example, the after-tax real rate of return is:

$\frac{(1 + 0.1445)}{(1 + 0.025)} – 1 = 1.1166 – 1 = 0.1166 = 11.66\%$(1+0.025)(1+0.1445)​−1=1.1166−1=0.1166=11.66%

That figure is quite a bit lower than the 17% gross return received on the investment. As long as the real rate of return after taxes is positive, however, an investor will be ahead of inflation. If it’s negative, the return will not be sufficient to sustain an investor’s standard of living in the future.

The Bottom Line

When you are assessing the value of your investments, it’s important to look at not just your nominal rate of return but also the after-tax real rate of return, which takes into account the taxes you’ll owe and inflation’s effect. The after-tax real rate of return can tell you if your nest egg investments will allow you to maintain your standard of living in the future.

What Is the Average Daily Rate (ADR)?

The average daily rate (ADR) is a metric widely used in the hospitality industry to indicate the average revenue earned for an occupied room on a given day. The average daily rate is one of the key performance indicators (KPI) of the industry.

Another KPI metric is the occupancy rate, which when combined with the ADR, comprises revenue per available room (RevPAR), all of which are used to measure the operating performance of a lodging unit such as a hotel or motel.

Understanding the Average Daily Rate (ADR)

The average daily rate (ADR) shows how much revenue is made per room on average. The higher the ADR, the better. A rising ADR suggests that a hotel is increasing the money it’s making from renting out rooms. To increase the ADR, hotels should look into ways to boost price per room.

Hotel operators seek to increase ADR by focusing on pricing strategies. This includes upselling, cross-sale promotions, and complimentary offers such as free shuttle service to the local airport. The overall economy is a big factor in setting prices, with hotels and motels seeking to adjust room rates to match current demand.

To determine the operating performance of a lodging, the ADR can be measured against a hotel’s historical ADR to look for trends, such as seasonal impact or how certain promotions performed. It can also be used as a measure of relative performance since the metric can be compared to other hotels that have similar characteristics, such as size, clientele, and location. This helps to accurately price room rentals.

Calculating the Average Daily Rate (ADR)

The average daily rate is calculated by taking the average revenue earned from rooms and dividing it by the number of rooms sold. It excludes complimentary rooms and rooms occupied by staff.


$\text{Average Daily Rate} = \frac{\text{Rooms Revenue Earned}}{\text{Number of Rooms Sold}}$Average Daily Rate=Number of Rooms SoldRooms Revenue Earned​

Example of the Average Daily Rate (ADR)

If a hotel has $50,000 in room revenue and 500 rooms sold, the ADR would be $100 ($50,000/500). Rooms used for in-house use, such as those set aside for hotel employees and complimentary ones, are excluded from the calculation.

Real World Example

Consider Marriott International (MAR), a major publicly traded hotelier that reports ADR along with occupancy rate and RevPAR. For 2019, Marriott’s ADR increased by 2.1% from 2018 to $202.75 in North America. The occupancy rate was fairly static at 75.8%. Taking the ADR and multiplying it by the occupancy rate yields the RevPAR. In Marriott’s case, $202.75 times 75.8% equates to a RevPAR of $153.68, which was up 2.19% from 2018.

The Difference Between the Average Daily Rate (ADR) and Revenue Per Available Room (RevPAR)

The average daily rate (ADR) is needed to calculate the revenue per available room (RevPAR). The average daily rate tells a lodging company how much they make per room on average in a given day. Meanwhile, RevPAR measures a lodging’s ability to fill its available rooms at the average rate. If the occupancy rate is not at 100% and the RevPAR is below the ADR, a hotel operator knows that it can probably reduce the average price per room to help increase occupancy.

Limitations of Using the Average Daily Rate (ADR)

The ADR does not tell the complete story about a hotel’s revenue. For instance, it does not include the charges a lodging company may charge if a guest does not show up. The figure also does not subtract items such as commissions and rebates offered to customers if there is a problem. A property’s ADR may increase as a result of price increases, however, this provides limited information in isolation. Occupancy could have fallen, leaving overall revenue lower.

What Is Alphabet Stock?

An alphabet stock refers to a separate class of common stock that is tied to a specific subsidiary of a corporation. More broadly, it refers to shares of common stock that are distinguished in some way from other common stock of the same company.

It is called an alphabet stock because the classification system used to identify each class of common stock uses letters to distinguish it from the parent company’s stock. Alphabet stock may have different voting rights from the parent company’s stock.

Understanding Alphabet Stock

Publicly traded companies may issue alphabet stock when purchasing a business unit from another company. This unit becomes a subsidiary of the acquirer, and holders of the alphabet stock are only entitled to the earnings, dividends, and rights of the subsidiary, not the entire acquirer. A similar situation would be the issuance of tracking stock, where a firm issues a subclass of shares on an existing subsidiary.

Alternatively, like with all stock issuance, a firm may issue a new class of common stock to raise capital. However, this new asset class of stock may have limited voting rights, allowing insiders and management to maintain control of the firm.

Alphabet shares may be indicative of a complex capital structure. Companies with complex capital structures and several subsidiaries and divisions may have a combination of several different varieties of common stock classes, with each share class carrying different voting rights and dividend rates.

Special Considerations

When alphabet stock is issued, typical nomenclature is to see a period and letter behind the existing stock symbol, indicating a separate share class. So, for example, if ABC company, whose stock symbol is ABC, issued Class A and B shares, the new ticker for these shares would be ABC.A. and ABC.B., respectively.

There is no standard format for alphabet stock in terms of which share class has more voting rights if voting rights differ among them. Typically, Class A shares would have more rights than Class B, and so forth, but it is important to read the details about share classes before investing. To learn more about the issuance of multiple share classes by a firm, check out related writing on the topic.