SEC Addresses Application Of 3.8% Tax On Net Investment Income To After-Tax Performance Data

 

[27046]

February 22, 2013

TO: ACCOUNTING/TREASURERS MEMBERS No. 7-13
ADVERTISING COMPLIANCE ADVISORY COMMITTEE No. 8-13
SEC RULES MEMBERS No. 26-13
SMALL FUNDS COMMITTEE No. 4-13
TAX MEMBERS No. 12-13 RE: SEC ADDRESSES APPLICATION OF 3.8% TAX ON NET INVESTMENT INCOME TO AFTER-TAX PERFORMANCE DATA

 

The Health Care and Education Reconciliation Act of 2010 imposed on certain taxpayers a 3.8% tax on net investment income effective January 1, 2013.  The tax is equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount by which the individual’s modified adjusted gross income exceeds a threshold amount of $200,000.  For joint return filers the threshold amount is $250,000.  Net investment income for this purpose includes income from interest, dividends, and net capital gain.
 

The SEC staff recently addressed application of the 3.8% tax on net investment income to after-tax performance data calculated pursuant to Item 26 of Form N-1A. [1]  The guidance indicates that registrants should include the 3.8% tax in after-tax return calculations.  The American Taxpayer Relief Act of 2012 increased the highest marginal income tax rate on ordinary income to 39.6% effective January 1, 2013.  The highest marginal income tax rate on capital gains and qualified dividend income was increased to 20%.  Accordingly, when calculating after-tax performance data, funds should apply a 43.4% rate to ordinary income and 23.8% rate to capital gains and qualified dividend income.  The SEC guidance also indicates that funds should include the 3.8% rate when calculating the tax benefit resulting from capital losses upon sale of fund shares (i.e., use 23.8%).

 

Gregory M. Smith
Senior Director of Fund Accounting and Compliance

endnotes

[1] The guidance is available on the SEC website at http://www.sec.gov/divisions/investment/issues-of-interest.shtml#after-tax.