Investing & Taxes
No one should pay more income tax than the rules require. But if you don't know all the rules, it's easy to make mistakes that can be costly.
- Understand how cost basis affects your taxes. When you sell shares of a mutual fund, you owe tax on your gain. But determining the gain can be tricky, especially if you've invested at various times. The IRS allows you to choose among several methods to determine the cost of your initial investments, which is called your cost basis. Learn more about cost basis.
- Review year-end distribution dates. This often occurs in December. You may want to delay purchasing shares in a fund until after this date, which is called the ex-dividend date, to avoid taxes on an investment you just made. This information can also help you estimate your tax bill for your upcoming tax fling.
- Consider the tax implications of exchanging from one fund to another. Even if you're electronically transferring shares of one mutual fund to another mutual fund, you are selling the shares of the first fund and buying shares of the second. The sale of the first fund is a taxable event unless the funds are in a retirement plan or other tax-deferred account.
- Consider tax-efficient funds. If you plan to invest in a taxable account, you may want to explore funds that are designed to help you preserve capital.
- Offset capital gains with capital losses. You may be able to use capital losses from one investment to offset capital gains from another, dollar for dollar. Talk to your tax advisor or visit www.irs.gov for more information.
Taxes should never be the only-or even the most important-consideration when investing in mutual funds. You should look for funds that have solid management and good track records and that meet your long-term investment strategy. These features are more likely to help you meet your financial goals, even considering the cost of taxes.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.