It's that time of year again---- when Uncle Sam asks for his share of your fund's winnings.
It doesn't really matter whether your fund shares appreciated in value in1998 or not. The first thing that triggers a tax consequence for fund shareholders is if any of a fund's portfolio holdings were sold during the year and a net capital gains situation incurred. If that was the case, because mutual funds by law are required to distribute all of their net gains to shareholders each year, you'll probably have a capital gains tax to pay.
The second thing that catches Uncle Sam's eye is if you've sold, i.e. redeemed, any of your fund shares. Or, exchanged them. Any kind of change in your fund account causes some kind of taxable event. Provided of course, your fund investments aren't a part of a qualified retirement account. In that case, taxes are levied at a later date.
With the T-word on everyone's mind during the first few months of each year, here is a check list of questions that once answered might help to inform and perhaps even take some of the sting out of your tax season.
Have I received a year-end statement from my fund family (or families) showing all the activity in my fund account(s)? If not, call the fund families you've invested with and ask those statements be sent to you immediately. While most investors receive their year-end statements by the end of January, sometimes mistakes happen.
Do I have the appropriate IRS forms? There are three IRS 1099 forms that mutual fund investors need to be acquainted with: The 1099- DIV form shows distributions made to fund shareholders; the 1099-B form is used to report a sale of fund shares whether that sale represents a capital gain or loss; and the 1099-R form reports distributions made from a retirement plan or individual retirement account.
Regarding the 1099-R form, according to Your Guide to Mutual Funds Taxation, free for the asking from Founders Funds, 1-800-525-2440, if the distributed amount indicated on this form was not rolled over into another tax-deferred account, you will need to include all or part of it in your ordinary income for tax purposes.
Do I know the differences between the dividends, short-term and long-term capital gains taxes that I may have to pay each year? According to the Founders guide, dividends come from things like the dividends paid by stocks held in the fund's portfolio and are taxed as ordinary income. Short-term capital gains are treated as ordinary income for tax purposes too and come from the sale of a security owned for 12 months or less. Long-term capital gains are taxed at a maximum rate of 20 percent ( 10 percent if you are in the 15 percent income tax bracket) and are distributed if a net gain was realized after it sold securities owned longer than 12 months.
Have I opened a qualified retirement account? IRAs, Roth IRAs, SEPs, Keogh's, 401 (k)s and any qualified retirement accounts are smart ways to save and invest for the future. And in some but not all cases, might even afford you a tax break come April 15.
"We like to see people max out on things like their 401 (k) contributions," says Jeffrey Kahn, an employee benefit attorney and senior partner at the law offices of Kahn & Waxman in Boca Raton.
Kahn said that the maximum limit for 401 (k) and 403 (b) annuity plans for the 1998 and 1999 tax years is $10,000; the cap for IRAs is still $2000; and that the self-employed might be able to put as much as $30,000 into a qualified pension or profit sharing plan.
If you're in the market for more tax tips, INVESCO's 1998 Taxes and Mutual Funds Guide is another good source, Request it by calling 1-800-525-8085. Or, surfing various fund family web-sites can be rewarding. T Rowe Price's, Tax Considerations for Investors Guide, for example, can be downloaded from their web site, www.troweprice.com. You can also check out the IRS either via their toll-free number, 1-800-TAX-FORM, or visit them on the web at www.irs.gov.
And in all cases, because no two us have the same income, number of deductions or make the same investments, working with a qualified CPA or account always makes good sense.
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