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taxes and investment charts

Mutual Fund Education

7 Essential Tax Tips for Mutual Fund Investors

Mark P. Cussen Oct 01, 2014

Mutual funds are popular with investors because they offer diversification, liquidity and professional money management in a convenient vehicle. However, mutual fund investors will get a tax bill for the dividends, interest, and any capital gains that they receive each year. Fortunately, there are several things you can do to lower the numbers you see on your 1099 forms that your funds send you. Knowing how the tax rules work for investments can greatly aid you in reducing the bill you get from Uncle Sam.

Avoid Unnecessary Liabilities When You Can


Be sure to also see the 7 Questions to Ask When Buying a Mutual Fund


Buy Your Funds in Retirement Plans



Look for Tax-Efficient Mutual Funds


See also Under the Hood of the Most Popular Mutual Funds


Generate a Capital Loss to Offset Your Gains


If you own a fund that is generating substantial capital gains, then you could sell a stock that has declined in price, wait 31 days to buy it back and then write the realized loss off against the gains from the funds when you file. Just be aware that whatever you sell with the intention of buying back may rise in price during the waiting period.


Watch Your Cost Basis and Keep Careful Records


  • First In First Out (FIFO), where the first equal number of shares that were purchased will determine the gain or loss on the number of shares sold.
  • Last In First Out (LIFO), where the most recent equal group of shares purchased is used. This method will quite often result in the smallest possible gain and may be the best option if you want to report the smallest possible gain for the year.
  • Dollar Value LIFO, where the last equal dollar amount that you purchased is matched against the dollar amount you sold.
  • Average Cost, that uses a mathematical average of all of your purchase prices. This can sometimes be the only choice if you don’t have complete basis records.
  • Specific ID, where a specific block of an equal number of shares is used to compute basis for a sale. This may be preferable to LIFO if there is a block of shares with a higher cost basis than the LIFO shares have.

See also How to Read Your Annual Mutual Fund Report

It is not always easy to determine which method of accounting is best, but the key is to keep good records right from the beginning. This will give you more options to choose from when you choose your accounting method. And don’t hesitate to consult with a tax advisor if you need help; this can be a tricky endeavor in many cases.


Add Reinvested Dividends to Your Basis



Understand That Exchanges Are Taxable Events



The Bottom Line


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