Financial Planner: How Mutual Funds are taxed

Taxes (MGN)

We are now coming into that time of the year where we have received our tax statements and 1099 forms. Today we want to talk about how Mutual Funds are taxed.

Well, Sara, many people have heard the Benjamin Franklin quote, “In this world nothing is certain but death and taxes.” Mutual fund taxes can be hard to understand. However, if you understand the complexities of mutual fund taxes and are prepared now that tax season is here, you may be able to lessen the blow.

Unless your mutual fund is in some kind of retirement account, the first thing to remember is that you generally must report any mutual fund distributions as income. Even if you reinvest your profits, the federal government still views this as personal income. Your mutual fund will send you a Form 1099-DIV describing what earnings to report on your income tax return. There are two main ways that mutual funds are taxed: dividends and capital gains.

Dividends represent earnings on the fund and are either “qualified” or “ordinary”. If your dividends are ordinary, or “Non-qualified”, it means that they are going to be taxed just like any other income you have. The good news about “Qualified” dividends is that they are taxed at a lower rate.

Capital gains are profits from investor trading or distributions given to shareholders after revenue is taken in from the fund manager’s sales of securities. Provisions in the tax law allow you to pay lower capital gains taxes on the sale of assets held more than one year. These are referred to as “long-term” capital gains. If you have that, you can get this capital gain by something that happened in the fund itself, OR by selling the fund yourself and causing any gains to be “Realized”.

The maximum long-term capital gains tax rate is 20 percent (0 percent for individuals in a tax bracket lower than 25 percent, 15 percent tax for those at a 25 percent bracket on up to the 39.6percent rate, and 20 percent for those in the 39.6 percent bracket. Short-term gains — those resulting from the sale of assets held less than one year — are taxed at your highest federal income tax rate.

As with all 1099’s, be sure to bring your 1099-DIV in with you to your tax preparer when you go. It will have all of the information that your tax person needs.

If you have questions about your particular mutual fund, be sure to call your advisor and ask.

FSB Investment Center

401 East Ave., Holdrege, NE 68949

Phone: 308.995.4411

Toll-free: 877.310.4411

Fax: 308.995.8371


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