Thursday, December 4, 2008

Tax Hit On Mutual Fund Investors

Many of you will be hit with capital gain taxes in April, even though your mutual fund has lost money this year. This is due to long term holdings that were profitable that the mutual fund advisors have sold off this year to stem the losts on your mutual fund. We think paying these taxes when your fund is down is outrageous, so here's what you need to do right away to avoid paying the taxes:

1. Call your mutual fund company and ask if they will be paying out capital gains on YOUR specific fund.

2. If you're told they are paying out gains, ask what the payout date is.

3. To avoid being taxed (assuming the fund's shares have depreciated this year), consider selling the fund BEFORE the distribution date, which could come any day now.

Another Reason to Act Now

In addition to avoiding the capital gains tax, taking action now might also give you a loss to offset income, which is another benefit.

If you still want to own a particular fund over the long haul, you can always sell it now and buy the fund back again AFTER 30 days. This is to avoid the so-called "wash sale" rule, which would disallow your tax loss if you bought back that fund or a similar fund too quickly.

Chances are, the fund's shares will not have appreciated much in those 30 days, and you may set yourself up to avoid paying capital gains taxes next year! That fund will more than likely be sharing a huge chunk of tax-loss carry-forwards to help mitigate any capital gains that you'd have to pay in 2009 should you choose to reinvest in the fund.

I hope this blog will help you.

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