Frequently Asked Questions

Why isn't my tax rate the sum of the federal and state tax rates that I input?

Most states allow individuals and corporations to deduct expenses for state income taxes from their federal taxes. For this reason the AIMR PPS suggest that client tax rates should be computed according to:

Total Anticipated Tax Rate = federal rate + state rate - federal rate x state rate

Why didn't the non-discretionary capital gain adjustment apply to my portfolio when I specified certain client withdrawals forced the realization of capital gains?

The adjustment for non-discretionary capital gains suggested by the AIMR-PPS applies only to net client withdrawals in excess of cash inflows including interest and dividend income during the period. If the withdrawal input as a NDWD item was partially or completely offset by other positive cashflows during the period, then there will be no capital gain adjustment.

How can my after-tax performance be greater than the before-tax performance?

Capital losses taken by selling securities below cost are deductions to income and are thus credited with a positive rather than negative tax affect on performance. The AIMR-PPS assume that clients will have other income against which to balance any short term or long term capital losses from their investments. They thus require the addition of all tax credits to performance which can, on occasion, create after-tax performance which is greater than before tax. All of the taxes calculated by the PPMS program are implied taxes, not involving the actual payment of taxes which may be quite different depending on the client's other taxable events during the year. In particular, it is possible that clients may not be able to use all of the tax losses used in this calculation, but such losses can usually be carried over to later years so the calculation is still correct on an accrual basis.

What is accrued interest?

Many longer term fixed income securities pay interest only once or twice a year. If the actual interest payments were used to calculate investment performance, there would be a bulge in those months when the payments came and no income shown in all other months. But if you sold such securities, you would receive "accrued" interest from the last payment date right up to the date of sale. In other words, you are legally entitled to interest on a pro-rata accrued basis even though you receive it only every six months. The AIMR-PPS requires that before-tax investment performance be calculated on an accrued basis rather than cash basis. Implied taxes are thus also calculated on an accrued basis. For example, if you would normally receive $1200 interest over the year ($600 each every six months), the accrued interest would be $100 per month.

Why are some bonds taxed differently than others?

Tax laws in the United States very considerably from state to state but generally allow for the owners of municipal bonds issued by their states to avoid paying both federal and state taxes on this interest. As a result, the states can issue bonds to their citizens which carry lower interest rates than would otherwise be the case. If you own municipal bonds issued by a different state (i.e. you live in California but purchase a New York State bond), then you must pay state tax on the interest from such bonds but you do not have to pay federal tax.

What are OID discounts and why must they be amortized?

OID stands for Original Issue Discount and refers to the situation when a bond is issued at a lower than market rate of interest. No one would purchase such a low interest bond if sold at full market price, so the sellers also lowered the bond's original price (creating a "discount") while leaving the maturity par value constant. The hope was that owners would be able to claim that the gain upon maturity of the bond was a capital gain and thus subject to lower tax rates. However, the IRS caught on fairly quickly and now requires that OID discounts be amortized and taxed as though additional interest was received, even though it is not actually paid. This amortized interest is also added to the cost basis of the bond, so that the gain on maturity or sale is correspondingly reduced. Different rules apply to the amortization depending on the original issue date. PPMS 1.0 requires that users calculate any applicable OID amortization themselves (or receive the information from their investment managers). It should be entered with transaction type "OID".