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Year-end investment tax issues

By Kay Bell ·
Tuesday, November 19, 2013
Posted: 1 pm ET

Portfolios get a lot of attention as year-end approaches. It's even more intense now that the Dow is flirting with 16,000.

Regardless of which way the stock market is heading, the end of the year is a perfect time to make some moves, such as harvesting tax losses to offset any taxes you might owe on capital gains.

You say you didn't sell any assets so you don't have any gains to worry about. You might want to double-check your holdings. If you own mutual funds, you might have some taxes due, thanks to transactions made by the funds' managers.

When funds sell assets throughout the year, a portion of any gain from those sales is passed along to individual shareholders as capital gains distributions. That means shareholders owe the Internal Revenue Service for those gains.

Those taxable gains will be on the 1099 that you -- and the Internal Revenue Service -- get in January.

Yes, you'll owe the taxes even if you opted to reinvest your mutual fund distributions to buy more fund shares instead of getting the earnings directly.

And yes, even if a fund's overall value is down for the year, the transactions in the fund could mean you'll still face a tax bill.

You can avoid such tax surprises by investing in tax-efficient mutual funds. But until you make that switch, look at whether harvesting tax losses is a good move to make by Dec. 31.

Buying an ex-dividend tax bill

Also beware of the tax trap of buying a new stock or fund at the end of the year.

With the stock market booming, a lot of folks might be tempted to get in on the investing fun. Of course, many stock prices are high now, and there's that credo about buying low, selling high, but that's for another blog post.

If you are going to invest now, watch out for the specific timing of any new purchases.

Mutual funds typically make a payout to shareholders of dividends and/or capital gains to shareholders at the end of the year. That date, generally referred to as the ex-dividend date, is noted in a fund's prospectus. You also should be able to find it on the fund company's website.

If you're thinking about buying a mutual fund, check on its ex-dividend date and wait to buy until after that distribution is made. If you own shares of the fund on the dividend date, regardless of whether you bought the fund in January or the day before the ex-date, you'll get the dividends and the associated tax bill.

By buying after the payment is on the books, you'll avoid a tax bill this year on your newly purchased fund.

Of course, don't make investment decisions based solely on tax implications. And always get professional advice about your tax and financial moves.


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Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and co-author of the e-book "Future Millionaires' Guidebook."

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November 22, 2013 at 9:04 am

I know it is a bad idea to have too much invested in a single security. Harvesting tax losses sounds like a great idea to offset the huge capital gains from selling stock you've owned for a long time. I've been looking for an excuse to diversify my portfolio more.