Most of these asks for estimated income. I have no earned income. I live off of investment income. How do I account for that investment income?

Hypothetically, let's say, I have $2,000,000 invested in an S&P 500 fund. To keep the numbers simple, let's say the S&P 500 averages 10% return a year(lots of variance per year). Of that 10%, 2% is returned as dividends. So $40k of dividends income. It seems obvious that the dividend income should be included in estimated income since it's realized. The dividend range is fairly consistent.

On average, I'll make $160k of capital gains(10%-2%=8%. 8%*2MM). My cost of living is $50k. So, I sell $10k of my investments to cover my cost of living($50k - $40k(dividends)). Another wrinkle is that $10k that I sell won't be a $10k capital gains. It will be less since it's proceeds - cost basis. So, I sell $10k and I match it to the amount that cost me $7k to buy originally. My capital gains would be $3k.

On my taxes, I will have a gross income of $40k(dividends) + $3k(capital gains).

What would you report as your estimated income?

a) $200k - 10% S&P500 average * $2MM. Even though most of this is unrealized capital gains

b) $50k - dividends income + $10k sold

c) $43k - dividends income + $3k capital gains.

d) something else?

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whoknowsme2001 t1_jeff9gk wrote on March 31, 2023 at 4:49 PM

A few concepts to understand.

A credit card application will normally take one’s stated income. So you’re free to put whatever you like.

That information will still be reviewed (likely electronically) and if you’re technically not employed then that would usually result in the application declining.

You can put your source of income as investments but if the file gets to underwriter review they may want some sort of proof of this investment income. As dividends and capital gains are not guaranteed then they may not consider it as reliable income.

Typically a credit card company wants to see 2 years of consistent income in the same line of work.

Having significantly large assets may help to combat this issue, but if the creditor you’re applying with has no relationship with you then they have no way of knowing those assets exist.

It may be best to work with your bank or broker where the assets are held and see if they have some sort of affluent segment/customer program. They’ll likely be able to get you a card this way since they know you have the resources to support the debt.

As a last note. Under underwriting terms some forms of income are actually increased to more than their actual number. Not all types of income receive equal tax treatment. Social security benefits are tax exempt in some cases, municipal debt income can also be tax exempt, Roth IRA withdrawals, structured insurance settlements, life insurance loans used as income, child support isn’t taxed, and qualified dividends are taxed lower than income. In some of these cases a lender may calculate what the earned income equivalent of these assets is and apply that number towards qualification.

DrRobertBottle OP t1_jefjr6a wrote on March 31, 2023 at 5:18 PM

Thank you. This is my understanding as well. What would you self report on the credit card application?

To expand on your comment that they electronically verified income, it sounds like they will pull your credit report and look at how much you spend per month on your credit cards and other loans to estimate your monthly expenses and then look at how much you pay down on those to estimate your income. I'm imagine their model is robust but that is the data plus estimating your housing cost that they will look at.

It feels like you can put any value in that income field if you feel you can defend your position if they question you about it. So, I'm leaning towards answer A.

Applying for a mortgage is very different than applying for a credit card. In my situation, I have talked to banks and they aren't interested in underwriting me with a typical mortgage since my income that I report on my taxes is so variable. I do qualify for asset based mortgages which tend to have a higher interest rates.

As a side note, I have been unemployed and still successfully gotten credit cards. I think it's combination of my passive income and having a credit score that hovers around 840.

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sin-eater82 t1_jefsz08 wrote on March 31, 2023 at 6:19 PM

I would go with B.

This is why, and I think this is as reasonable of a reference point as it gets outside of some clear cut definitions from creditors. Consider if these were retirement accounts and how income is reported.

If the money was coming out of 401k/IRA/etc. accounts, you'd say your income that year was 50k. So I'd report what you get out of it on average.

That said, I have no idea how they would want you to properly account for it. Although, I feel really confident that it is not option A.

DrRobertBottle OP t1_jeg5bfo wrote on March 31, 2023 at 7:41 PM

I happened to be on the phone with my credit card company and I asked them what they thought. The CSR put me on hold for 5 minutes and told them they are not financial advisors and they can't give me advice on how to answer that question. I'm trying to answer their question accurately and they can't give me additional details on it. To be fair, it's not the bank's question but a Federal rule/guideline.

I could make a case for any of the answers. I'm going to investigate how public companies report their income from unrealized capital gains. It might not be an apple to apple comparison

DrRobertBottle OP t1_jeg68af wrote on March 31, 2023 at 7:47 PM

Interesting. I found this article and it states:

>Unrealized income or losses are recorded in an account called accumulated other comprehensive income, which is found in the owner’s equity section of the balance sheet. These represent gains and losses from changes in the value of assets or liabilities that have not yet been settled and recognized.

They interchange income and gains. So income are gains and gains are income. Now, I'm leaning towards answer A since capital gains are income regardless if they are realized or not.

sin-eater82 t1_jeg7a08 wrote on March 31, 2023 at 7:54 PM

Hmm, I mean, I would never lean that way. I can't realistically have negative income next year. That's just not a thing. You can have losses if you look at it that way. I don't think that's really the spirit of the question at all.

As for what you found about businesses, I mean, you're not a business. It's a vastly different context.

It's a weird one. That said, there must be "an answer" somewhere. You're not the only person living off of investments afterall.