Are mutual funds part of your
portfolio? As you begin your mid-summer investment review in preparation for
year-end, think about how your funds can affect your federal income taxes.
Here are two things to
consider.
Dividend income. The dividends you receive
from mutual funds held in nonretirement accounts are included in the
calculation of net investment income. When your 2015 modified adjusted gross
income exceeds $250,000 ($200,000 when you're single), a portion of your net
investment income will be taxed at a rate of 3.8% over and above your ordinary
tax liability.
Planning tip. The tax form the mutual fund company sends you at the
beginning of 2016 may classify some dividends as "qualified" –
meaning they meet the requirements for a lower tax rate. However, you have to
own the mutual fund shares for more than 60 days to get the lower rate on your
federal return.
Capital gains. Mutual funds generally
distribute short-term and long-term capital gains from in-fund sales to
shareholders. Even if you reinvest the distributions in additional shares
instead of opting for cash, the gain remains taxable to you.
Short-term distributions, for sales of fund investments held
one year or less, are taxable at your ordinary income tax rate. The tax rate
for long-term capital gains may be as high as 20%, depending on your adjusted
gross income.
You might also have a capital gain or loss when you sell
shares of a mutual fund. That's true even if you "exchange" one fund
for another and receive no proceeds.
Planning tip. You have options for calculating the cost of mutual fund
shares you sell during the year. Remember to include reinvested distributions
in your basis.
Please call for more
information. We're happy to help you manage your investments with an eye toward
tax savings.