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URL:  http://boards.fool.com/ltltif-youre-directing-that-the-cap-gains-and-10039901.aspx

Subject:  Re: Question for TMFTaxes Date:  10/9/1997  11:16 AM
Author:  TMFTaxes Number:  492 of 121144

<<If you're directing that the cap gains and dividends be
directed back into the fund, are they taxable in the
current year or are they deferred until you start withdrawing the proceeds?>>

Reinvested dividends ARE taxable to you, Mike...in the year that the dividends are distributed to your account, and NOT necessarily when you withdraw them from the account. And will be reflected as such on the 1099 form that you'll receive at the end of the year from the mutual fund company.

Reinvested dividends simply mean that you are ELECTING to take your distributions (taxable), and purchase additional shares with that distribution. But instead of sending you the check, and waiting for you to sent them a check back, the mutual fund company simply "bypasses the middleman" and directly reinvests the dividends.

But, in effect, and in the eyes of Uncle Sammy, you have received taxable distributions, and have purchased additional mutual fund shares at different prices.

Which, as you might imagine, will change your basis (or cost, for tax purposes) in the mutual fund. When you purchase additional shares, you are actually increasing the number of shares that you own, and also the amount of money that you paid for those total shares. This being the case, you REALLY want to hang on to your annual statements for almost forever. If and when you sell you shares, you'll need those year end transaction statements in order to determine your taxable gain/loss. (assuming that your mutual fund doesn't provide you with a gain/loss statement using the average cost method...many do but some still don't).

So the short answer is that Uncle Sammy WILL be looking for tax dollars on your mutual fund distributions, even if you never receive them directly, but simply reinvest 'em.

TMF Taxes
Roy
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