Taxes can be complicated, and for investors in mutual funds, they can be extremely complicated. There can be taxes on dividends and earnings when you own mutual fund shares, in addition to capital gains taxes when you sell your shares in the fund. You don’t even have a say in when to realize a gain in the fund’s holdings because that decision is made by the fund’s manager on behalf of all shareholders.
But once you break things down into the different types of taxes, it’s actually fairly straightforward to understand. Here are the key mutual fund taxes to be aware of and some strategies for how to minimize those taxes.
Mutual fund taxes
Mutual funds can be a great choice for investors because they allow you to hold a diversified portfolio of securities for a relatively small investment. But investing in mutual funds means you don’t have control over the individual holdings in the fund, which is up to the discretion of the fund manager. The fund’s price, or net asset value (NAV), will rise and fall based on the performance of the underlying holdings in the fund.
Even when you still own the fund taxes on mutual fund shares can be triggered in two ways:
- Dividends and interest: If the fund holds securities that pay dividends or interest, the fund will distribute your share of those payments to you and you’ll owe taxes on that income. Some mutual funds, such as municipal bond funds, focus on investments that are exempt from federal income tax. If you do receive dividends or interest from a fund you hold, you’ll likely receive an IRS tax form that shows your income from the fund for the year. The form may come from the fund company itself, or from your online broker.
- Capital gains: The fund manager may sell securities in the fund for a gain, triggering a capital gains tax. The tax impact will depend on how long the fund held the shares that were sold. The capital gains are distributed, typically once a year, to the fund’s shareholders, who will owe taxes on the gains.
For more details…
Read complete post here: