How Your Mutual Fund Can Affect Your Taxes

Mutual fund taxes can add a whole other level of confusion to tax filing season. When it comes to your mutual fund, it is important to understand whether you need to report it as income as well as what happens when you gain or lose. Below is a little information to better help you understand the world of taxes when mutual funds are involved.  

Reporting your Mutual Funds

Mutual funds must be reported as income whether or not you are reinvesting the profits. You should receive a Form 1099-DIV from your fund that explains to you what you will need to report.

Dividend Taxing

The net earnings of the mutual fund are known as the dividends. The highest amount of tax that is applied to the dividends is 15 percent. If you are within the 10 and 15 percent tax brackets, there is 0 percent tax for those that are qualified. In order to be considered qualified, the dividends must have been received between 2002 and 2011 from domestic and foreign corporations and have IRS approval.

Capital Gain Taxing

Capital gain is the profit that is given to shareholders from trading once the revenue has been taken. There is also a maximum long term tax rate of 15 percent. Those who are within the 10 and 25 percent tax brackets are taxed 0 percent. Short term gains however follow the highest federal tax rates when being levied against.

Tax-Exempt Funds

A tax exempt bond fund can help to shield yourself from high taxes on your mutual fund. These distributions are exempt from federal taxes. It is best for those in a higher tax bracket to invest in a lower tax exempt fund.

Gains and Losses

When it comes to mutual funds, you must report any gains that you experience during the year on your taxes. Losses may be deducted as investment property, however you cannot deduct them for personal. It is important to determine whether your gain or loss is long or short term when reporting. If it has been over a year it would be classified as long term. The extent to which your loss exceeds your gains can be taken as a deduction on your taxes. There is a limit to the deduction you can take. This limit is $3,000 if you file jointly or $1,500 if you are filing as single. When filing, it is important to correctly report both gains and losses. You will need to use Schedule D ‘Capital Gains and Losses’ to report. Once this has been filled out, you can enter that amount on line 13 on Form 1040. If you are unsure of how to file, you may want to hire an income tax consultant to advise you.

Note that after 2010, when it comes to both long term capital gains and dividends, the tax rates may rise. 

blog comments powered by Disqus