3 Mutual Fund Tax Pitfalls

Posted by lgtcpa on Dec 30, 2014

Investing in mutual funds is an easy way to diversify your portfolio. But beware of the tax pitfalls.

First, mutual funds with high turnover rates can create income taxed at ordinary-income rates. Choosing funds that provide primarily long-term gains can save you more tax dollars because of the lower long-term rates.

Second, earnings on mutual funds are typically reinvested, and unless you (or your investment advisor) keep track of these additions — and increase your basis accordingly — you may report more gain than required when you sell the fund. Since 2012, brokerage firms have been required to track (and report to the IRS) your cost basis in mutual funds acquired during the tax year.

Third, buying equity mutual fund shares later in the year can be costly tax-wise. Such funds often declare a large capital gains distribution at year end. If you own the shares on the distribution’s record date, you’ll be taxed on the full distribution amount even if it includes significant gains realized by the fund before you owned the shares. And you’ll pay tax on those gains in the current year — even if you reinvest the distribution. (See the Case Study “Mutual fund distributions can cost you taxes.”)

Information retrieved from http://www.webtaxguide.net/LGT/Investing/index.html#Mutual

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email askus@lgt-cpa.com.


Topics: Accounting Tips, Tax