Does your financial advisor call you in a hurry the first few weeks of December? If yes, you might have a non-qualified account with mutual funds in it that are paying large capital gain distributions. Capital gain distributions at the end of the year are the reality for mutual fund owners. Part of the tax rules for mutual funds is that they need to pass along their growth to shareholders in the form of a taxable capital gain distribution. In years where the fund has had appreciation these distributions are paid out most commonly in December before the end of the year. The good news: The fund you were invested in made money this year. Some tax sensitive clients might groan when this happens because the capital gain shows up on their 1099 and is a taxable event in the year that the gain is received. An important note: year end capital gain distributions don’t cause the same issue in a retirement account. Remember, you only are taxed on qualified account dollars when you put the money in your pocket.
This leads us to planning opportunities:
- Many times, the best thing to do is nothing. You still have more wealth, if that equals you paying more tax dollars at the end of the year, so be it. What do they say about death and taxes again?
- Consider your capital gain in the fund verses your cost basis in the fund. This might be why you get a call from the Mancino Utz group in December. Funds will release their estimated capital gain distributions usually a month or two before they pay them out. If your cost basis in the fund would allow you to sell out of the fund for a lesser amount of taxes, then maybe that’s a strategy you consider. You could move into a like fund, or repurchase after 30 days. There are advantages and disadvantages to this idea, so it’s best to talk with your advisor or CPA first.
- Consider investing in Exchange Traded Funds (ETF)s – these do not have the same tax requirements to pay out capital gains as mutual funds.
Happy capital gains and happy tax planning season! As always, give us a call if you think your capital gains are putting you in taxable disaster.