MUHLENKAMP FUND (MUHLX)DISTRIBUTIONS
Note: This information is for tax planning purposes and should not be used for tax reporting.
Record Date: All shareholders of record at close of business on this day are eligible to receive the distribution payment.
Ex-dividend Date: The day on which the distribution amount is deducted from the Fund’s Net Asset Value (NAV) or share price. It is generally the business day after the record date.
Payable Date: The day the Fund pays shareholders the distribution. For the Muhlenkamp Fund, the Payable Date is normally the same business day as the Ex-Dividend Date.
Estimated Distribution: Estimated distribution amounts are provided in advance of the distribution date to help shareholders evaluate potential tax liability for tax-planning purposes and are subject to change without notification. Amounts represent only approximate distribution amounts per share, calculated based on the Fund data provided on the “as of date” and will likely change before the payable date due to market volatility, changes to the portfolio, and shareholder activity.
Actual Distribution Amounts: Actual distribution amounts are the dollar amounts paid per share. The amounts posted above should NOT be used for tax reporting. IRS Tax forms will be issued for tax-reporting needs to all taxable accounts that receive distributions in excess of $10.00.
Please see the Distribution Frequently Asked Questions (FAQs) below for additional distribution information.
What considerations for Dividend and Capital Gains Distributions are used for the Muhlenkamp Fund?
The goal of the Muhlenkamp Fund is to make our shareholders a good return after taxes and inflation. This means minimizing the tax rate and postponing capital gains to the extent that it may be profitable.
How do we seek to “minimize the tax”?
We prefer long-term capital gains and qualified dividends over short-term capital gains and ordinary dividends. Here’s why:
• Long-term capital gains (earned from the sale of investments held longer than one year), along with qualified dividends, are taxed at 0%, 15%, or 20% depending on your tax bracket; a 3.8% surtax is applicable to higher income taxpayers.
• Short-term capital gains (earned from the sale of investments held for one year or less), along with ordinary dividends, are subject to ordinary income taxes, which range from 10%-37%.
Fund shareholders (except those with tax-deferred accounts such as an IRA, Roth IRA, Coverdell Education Savings Account, etc.) are required to pay taxes for the year the distributions are received. Accounts with distributions in excess of $10.00 receive IRS Form 1099-DIV, which is mailed at the beginning of the calendar year following the distribution.
What do you mean by “postponing capital gains to the extent that it may be profitable”?
We believe the proper time to sell a security is when the underlying trend that drove its performance has matured. It’s much like growing tomatoes…
The whole point of planting tomatoes is to harvest ripe tomatoes, and the time to harvest them is when they’re no longer growing. Similarly, we believe the time to sell assets is when they’re no longer growing. In investing, the growing season is often 3-5 years or more. This often means that you pay the tax on the harvest in a year when the asset price didn’t grow. (If you sell it while it’s still growing, you probably sold it too early.) The fact that Uncle Sam may claim a portion of your gain may be incidental to the process. Harvest the crop and celebrate!
Historically, during the period between mid-December and mid-January the stock market typically has positive returns (known as the January Effect). We have found that the strongest stocks during this period tend to have been the ones that did poorly prior to mid-December. In other words, we believe the absolute worst time to take tax losses may be mid-December (probably because so many others are selling to take a tax loss at that time). This is why we begin tax planning in August with a second round in October. Any losses visible in December, we would rather hold until January-February to get a start on the next year’s tax bill.
How are distributions paid?
Distributions are payable in one of three ways:
1. You may elect to receive a check/ACH for the amount of the distribution.
2. You may elect Automatic Reinvestment of Distributions, which will generate the purchase of additional Fund shares.
3. You may reinvest a percentage of the distribution and have the rest paid by check/ACH.
How can my distribution options be changed?
Distribution options may be changed prior to the payable date for that distribution using an Account Options Form and some requests may be made by speaking to a Shareholder Services Representative.
Do distributions affect the Fund’s Net Asset Value (NAV)?
On the Ex-Dividend Date, capital gains and dividend distributions cause the Fund’s NAV per share to decrease by the amount of the distribution. This is not due to performance, but reflects the fact that you will have more shares in your account—or have received a check—due to the distribution. If you reinvest capital gains and dividend distributions, your account value will not change, you will simply have more shares at a lower price per share.
The distribution may look like a “paper shuffle,” but it’s one that allows the IRS to collect taxes; refer to the following hypothetical example:
Hypothetical Example of a $2.00 per Share Distribution*
* Assumes the NAV or share price of the Fund does not change due to market activity.
Note: Market activity may also impact the Fund’s NAV on the Ex-Dividend date, so the total change in NAV per share may be more or less than the distribution.
Do distributions affect the Fund’s total return?
“Total return” includes the amount of distributions (dividends and capital gains) plus capital appreciation.
Why would the Fund make a capital gains distribution when performance is flat or down for the year?
A capital gains distribution has no relationship to the Fund’s annual performance.
Capital gains reflect appreciation over the full period that we owned the related assets (often 3-5 years or more), which is based on when and at what price the assets were originally purchased. Remember: We believe the time to harvest the crop is after it has stopped growing. So even though the Fund’s performance may be flat or down for the year, the sales of those assets can result in a capital gains distribution, particularly if they have been held for a long period of time.
We want to sell our companies’ stocks after they have gone up, and then use that money to buy the stocks of companies that are undervalued. If we do that well, we should be making distributions and paying taxes after the good years, not during them. (Even though the IRS operates on a one-year calendar cycle, the economy and the markets do not; therefore, neither do we.)
Do capital gains distributions affect the cost basis of an account?
1. If you elect to receive a check for the amount of the distribution, the cost basis of your account will not change.
Let’s say you purchased 100 shares of a mutual fund with an NAV of $10 per share: your cost basis is $1,000. Over time, the fund’s NAV increases to $12, and the fund pays $1 per share in long-term capital gains. You will receive a check for $100 as the long-term capital gains distribution, and the fund’s NAV will drop to $11 per share. Your cost basis, however, will remain at $10 per share or $1,000.
2. If you elect to reinvest your capital gains distributions, they will add to the cost basis of your account—but are taxed only once. When you track and calculate the cost basis of your account, treat the reinvested distribution as another investment that you made out of pocket. This will increase your cost basis and lower your future tax bill.
Using the previous example, if the capital gains distribution of $100 is reinvested, the money will buy an additional 9.09 shares at $11 per share. Your cost basis for owning the additional shares is $1,100: $1,000 (the original purchase price), plus the $100 that was reinvested.
What’s the relationship between reinvested distributions and wash-sale rules?
A wash-sale occurs when you realize a loss on the redemption of fund shares and, then, acquire shares of that same fund (in any account)—including the reinvestment of distributions—within a 30-day period before or after the transactions occur. In a wash-sale, the loss you realized on the sale or exchange is disallowed.
Continuing with our illustration…Let’s say the NAV of the 100 shares you purchased at $10 per share (your cost basis is $1,000), declines by 30%. If you want to sell those shares to realize losses for tax purposes, you must sell those shares more than 30 days before, or 30 days after, the distribution’s Payment Date. If you sell the shares within that 61-day window (i.e. 30 days before the Payment Date, the Payment Date itself, or 30 days after the Payment Date), the loss will be disallowed under the wash-sale rules.
Can distributions affect Adjusted Gross Income (AGI), as reported on 1040 tax returns?
The distribution in a taxable account is included in your AGI and may increase the tax you owe on the rest of your income. The distribution may also subject you to the Alternative Minimum Tax (AMT), or may change what you should be paying in quarterly estimated taxes. This is especially relevant for people with large accounts worth tens or hundreds of thousands of dollars.
Also, Medicare participants pay a premium each month for Part B (Medical Insurance). While most people pay the standard premium amount, if your Modified Adjusted Gross Income (MAGI) as reported on your IRS tax return from two years ago is above a certain amount, you may be subject to an Income Related Monthly Adjustment Amount (IRMAA). IRMAA is an extra charge added to your premium.
NOTE: The MAGI on the 2023 tax return will determine the Part B premium in 2025. This can also impact the premiums for Part D drug plans and Medigap Plans.
Please call us at (877) 935-5520, if you have any questions regarding distributions, or anything else regarding your account(s). We appreciate the confidence you have placed in us.
Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and is not exhaustive. Investors must consult their tax adviser or legal counsel for advice and information concerning their particular situation. Neither the Fund nor any of its representatives may give legal or tax advice.
This information is for informational purposes only and is not intended as tax advice.
The Muhlenkamp Fund is distributed by Quasar Distributors, LLC.