Tax Tip of the Week
December 4, 2006

Funds are required to distribute the dividends and interest they earn, as well as capital gains or losses from trades they make. They may make distributions at intervals during the year, but there’s usually a big distribution in December.

Here’s what you need to know.

• If you hold the mutual fund in a retirement account such as a 401(k) plan or IRA, there’s no immediate tax impa
ct.
• If your mutual fund is in a taxable account, you’ll generally need to include any distributions in your 2006 income.
• If you purchased the fund only in the last few weeks, you could be paying tax on the fund’s earnings from earlier in the year. In effect you bought the upcoming distribution as well as the accompanying tax liability when you bought shares in the fund. For that reason, some investors hold off investing in mutual funds in the weeks before a distribution is planned.
• If you have your dividends reinvested, you won’t receive a check for the distribution. However, you must still pay taxes on it. The good news is that you can add the taxable amount to your cost basis. That should help reduce your taxable gain when you sell your shares in the fund.
• Your distribution may consist of several components, each taxed differently. Qualified dividends and capital gains enjoy special low rates. You include other dividends with ordinary income.
• Your mutual fund company will send you a form 1099-DIV explaining each component.

If you have questions or need assistance with this or any tax issue, contact our office.

Questions for our Financial Expert?
E-Mail us at: finance@ClevelandSeniors.Com