Five Steps to Stress Free Year End After-Tax Returns

Date: November 15, 2013

As Thanksgiving quickly approaches in the U.S., millions will try to balance the stress of planning the most anticipated home-cooked meal of the year with the earlier and earlier arrival of the Christmas shopping rush.  Did anyone else see that several popular retail chains are opening at 5 and 6 p.m. on Thanksgiving Day? Forget about Black Friday! The new holiday directive looks something like “grab the turkey leg and head for a line at your favorite retailer before the pumpkin pie is even served”.

As I saw this news, I also saw an article on “How to Have a Stress-Free Thanksgiving” which got me thinking that there are some similarities here with year-end mutual fund reporting. It seems like the list of requirements, regulatory reports and internal information requests continue to multiply along with the expectation that the information should be provided sooner and sooner. With this in mind, I thought it might help to provide my five steps for a quick and less painful after-tax returns season. You just might have more time for the craziness noted above–or for those who don’t want to eat and run, maybe just a little more time to spend with family this season.

  1. Update the tax rates for 2013
    With the end of the Bush tax cuts (at the highest income tax brackets), all after-tax returns have to reflect the new 39.6% income tax rate and the 3.8% healthcare surtax, setting the highest income bracket at 43.4%. The highest capital gains tax rate is now 20%, and it also must include the surtax of 3.8% for a total at 23.8%. Ensure the new tax rates (provided by Confluence or other performance system vendors) have been updated in your system.
  2. Consider the breakout adjustments
    Consider whether you have tax breakouts to adjust. Have you reflected the qualified distributions accurately? Has your tax department provided the qualified amounts? If not, when are they scheduled to provide them? Do you have any short term gains that can or should be reclassified? Get the answers to these questions in advance.
  3. Adjust the data
    Make the updates to the distribution data in your performance system. If you are using Unity® Performance, there are two options to help you make the dividend characterization updates. The first is the Distribution Breakout Tool. This tool allows you to enter a start and end date (typically a calendar year) and based on percentages provided by your tax department, automatically goes back and adjusts the distributions for that time period in the system for the affected funds. The second option is to use the Inbound Distribution layout. This Inbound file format was specifically created to allow adjustments to dividend and capital gain distributions. (Talk with your Confluence Business Support Analyst to see which option is right for your situation or consult the Unity Performance User Guide which provides detailed instructions on using both options.)
  4. Review the results
    Review your changes to ensure the total distributions haven’t changed. If using Unity Performance, the distribution breakout tool makes this step easy. For each fund, a report is created that shows the before and after results. If you use the Inbound layout option, check for notifications that will alert you if the breakouts you included don’t add up to the previous total distribution.
  5. Produce 12/31 After-Tax Returns
    Now that the distribution data and tax rates have been updated, run the before-tax returns and the after-tax returns. Add a final review at this point to compare the before and after results of the returns to the previous year’s 12/31 returns to ensure that only the after-tax returns have changed. If you see something that doesn’t look right, and you are using Unity Performance for the calculations, check out the return detail in Perform for troubleshooting.

Following these five steps and preparing in advance should provide you with a head start on the annual requirement for calculating after-tax performance. They won’t, however, help you figure out how to drive to the mall holding a turkey leg or with how to beat the rush for the next flat screen TV deal; you’re on your own for those.

To learn more about 13f-2 watch our webinar replay Part 1: Unpacking the SEC's New Disclosure Rules for Shareholders
Join us for Part 2: Operationalizing the SEC's New Disclosure Rules, for Shareholders on December 12.