Tax Tips For Investing In Mutual Funds


Certain tax cuts related to the trading of mutual funds should be taken into account. Awareness of these disadvantages will reduce taxes and prevent surprises from occurring during your visit to your accountant.

You should know that it is possible to sell a mutual fund without knowing it or what a customer has called a "Stunner" sale . This can happen if your mutual fund has the option to issue checks on your investment in the fund. Whenever checks are deducted from the investment, a partial sale of the investment is being executed. A taxable gain or deductible loss arises from each check denominated, with the exception of funds whose shares are always denominated in dollars (for example, money markets). In addition, each sale must be included in the annual income tax return as a position.

Some clients are also surprised when taxable sales result from rebalancing the investment portfolio in funds. Most mutual funds allow investors to make changes and allocate how the account is invested. Rebalancing and reviewing an investment portfolio is a fundamental principle of money management. Rebalancing and transferring money from a mutual fund to another mutual fund is a taxable sale of the transferred mutual fund.

Record keeping is also important. Investors must record all official receipts and correspondence such as Form 1099-DIV, statements and transaction confirmations. Surveys are useful when it comes to calculating the costs of investments sold. Most fund companies allow investors to reinvest their dividends to buy additional shares or fractional shares when paying the dividend. These documents are required to calculate the amount of the taxable gain or deductible loss on the sale of the investment. This paperwork has added value during an IRS audit. Some customers receive statements at the end of the year with a complete list of all transactions of the year. We generally recommend that you keep your annual statements and get rid of other statements of account you receive during the year. Always save envelopes that contain "tax information inside".

In 2011, document retention requirements were reduced and streamlined. The new rules require mutual fund companies to track any gains or losses on investments sold by the company and to provide this information to investors. The company should also indicate whether the gains and losses are short or long term.

For investments purchased prior to 2011, mutual fund companies generally provide investors with all the information they have to help calculate the potential gain or loss on the sale of the fund.

Timing is another concept to consider. Earnings distributions can be a bad thing, believe it or not. In general, investors should avoid buying a fund close to the date of distribution of the capital gain or dividend. The dividend is taxable and increases the tax payable by the investor. These payments increase the tax despite the fact; the money is reinvested in new shares. On the other hand, an investor may consider selling a mutual fund at the end of the year and should weigh the tax and non-tax effects of the sale for the current year against a sale the following year. . The next year's sale transfers the gain or loss to the next taxation year.

Long-term investors should also determine which shares of the same investment should be held and which ones should be sold. There are guidelines for identifying these actions and compliance with these instructions can reduce tax. One way to reduce taxes is to identify shares held for more than one year and to benefit from the higher rate of appreciation over the long term. Another way to save tax is recovering losses, for example, suppose Karla owns 100 shares of Google. She bought 40 shares at $ 40 per share, 30 shares at $ 80 per share and the remaining 30 shares at $ 50 per share. Karla then sells 30 shares at $ 70 per share. By specifically identifying the shares, Karla can match the shares that she sold to the 30 shares she bought at $ 80 action, generating a tax loss.

We hope this article has been helpful. This article is an example only for illustrative purposes. It is a general resource and not a recommendation.

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