Time To Review Your Mutual Fund Investments, now might be a good time to review your mutual fund investments with a tax-wise eye toward improving your 2013 returns. For any investment, your actual return is the return you realize after accounting for taxes and other expenses paid on the investment. And, by their nature, mutual funds generate capital gains, dividends, and interest that are taxable to fund shareholders.
The Tax Nature Of Mutual Funds
Managers of actively managed mutual funds buy and sell securities to tl}' to meet their fund's investment objectives. In addition, when fund investors redeem their fund shares, the fund may have to sell securities to pay the investors for their shares. Both of these transactions can generate capital gain income to the fund. The securities held by the fund may also generate dividend and interest income.
Mutual funds cannot simply accumulate these earnings and gains. They must distribute nearly all income - including realized net capital gains, dividends, and interest - to shareholders each year. Usually, you have the choice of receiving distributions in cash or having them automatically reinvested in additional shares. Unless a distribution represents a tax exempt- interest dividend or a return of your investment, you generally will be taxed on it - even if the distribution is reinvested, and even if you didn't sell any shares yourself. A capital gains distribution basically represents your share of the funds realized gains from trading activity.
Looking Ahead To 2013
Being aware of your mutual funds' potential tax exposure may be particularly important for 2013. Income taxes in general are scheduled to increase for most taxpayers, starting with the income-tax rates for ordinal}' income, such as investment interest and short term capital gains. For 2013, the current tax brackets - 10%, 15%, 25%, 33%, and 35% - are scheduled to be replaced with a 15%, 28%, 31%,36%, and 39.6% schedule.
Other investment income will also be affected. The long-term capital gains rate generally is expected to increase to 20% in 2013. Dividends are set to be taxed at ordinal}' income-tax rates instead of the lower rate that applies to long-term capital gains on stock sales. And a new 3.8% surtax on investment income applies to certain higher-income taxpayers starting next year.
Less Taxing Alternatives Mutual Funds
You have several alternatives to your currently held funds that could reduce annual taxes on your fund investments. Index funds invest to mimic the composition and returns of an investment index, such as the S&P 500 Stock Index or Barclays Capital U.S. Aggregate Bond Index. Consequently, these funds generally make fewer trades and generate less capital gain income than many actively managed funds.
Tax-managed funds are managed to keep the investors' tax consequences to a minimum. The managers use such strategies as trying to avoid short-term capital gains that would be taxed at your ordinary tax rate, investing in securities that they expect to show capital appreciation rather than to generate currently taxable dividends and interest, and taking other steps to minimize gains when selling a portion of a holding.
Exchange-traded funds (ETFs) are similar to index mutual funds, except, they are traded as individual securities. The most common ETFs replicate the holdings of a particular stock or bond index. With an ETF that tracks a broad market index, your potential tax exposure will essentially come from receiving distributions of interest and dividend income and selling your shares. Capital distributions are less frequent, but possible.
12 Employers: Deferred due date for [arm 941, If timely deposits were made.
17 Corporations: Pay fourth installment of 2012 estimated tax.
15 Individuals: Pay last installment of 2012 estimated tax with Form 1040-ES. Or file 2012 income-tax return and make full payment of any balance due by January 31,2013.
31 Employers: Distribute copies of Form W-2 for 2012 to employees.
31 Businesses: Distribute Forms 1099 or other information statements) to recipients of certain payments made in 2012. See us for more details.
31 Employers: File Form 941, Employer's Quarterly Federal Tax Return; quarterly deposit due
31 Employers: File Form 940, Employer's Annual Federal Unemployment IFUTA) Tax Return, for 2012.
November 2012 Page 3