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Subject:  Re: Basic Mutaul Fund/Tax Question Date:  4/10/1998  10:53 PM
Author:  tc001 Number:  3405 of 127617

<<Well on November 30, something strange happened - for no apparent market reason the listed value of the fund shares dropped from ~ $32 to ~$24 and the newspaper mentioned that "Both 12b-1 and redemption charge in effect". What the heck is going on?>>

The fund managers have been indicted for fraud and theft. Weren't you following that news story? If your heart is still beating, this is my sense of humor showing itself. Actually, what probably happened was that the fund made a distribution. This is common at year-end. If you look at your fund statement, you should see additional shares of the fund given to you in exchange for the lower price per share. DrBear recently posted a reply with detailed math, so I won't go into it again. I'll just leave the link for you to follow. That specific question concerned being taxed twice which you also ask about.

<<But the real tax question is this - What sort of capital gains charges do I have to pay if I didn't
sell any shares of the fund?>>

See the distribution question again and DrBear's math. Even if you don't sell shares, the fund still buys and sells stock. This creates the capital gains. Since the fund doesn't pay tax, the taxable event is passed on to the shareholders. Here's a hint to help you look like a pro when talking about mutual funds. Look at the fund's turnover rate. The higher the rate, the more stock it is selling each year and the more tax you'll have to pay even if you don't sell shares. A tax-managed fund refers to one that minimizes turnover within the fund (a buy-and-hold strategy) so your taxes will be minimized if the money you invest is not in an IRA.

<<...a dollar figure broken down into two sums... short term ..." and "long term ... " How do these relate to the schedule D form (1090?)>>

Now for the real fun. Place all of Box 1a (1099) on Line 5 of Schedule B. Place the total of Box 1c on Line 7 of Sch.B and also on Line 13, column (f) of Sch.D. On Sch.B, when you subtract Line 7 from Line 6 (same as Line 5 since you only have one fund to list), the remainder should be the same as Box 1b. If not, then you misread the numbers from Box 1c. Make sure that you are getting the correct total from Box 1c. Most funds list one total with a sub-amount listed as the 28% gain (I'll cover that later). If your 1099 lists long and short, then these added together would be the total. Go back to Sch.D. On the 1099, as I just said, Box 1c should have a sub-amount listed as "28% gains" or short-term gain or something to that effect. Place that amount on Line 13, column(g) of Sch.D. The rationale is that the total gain (column f) is made up of the short-term gain taxed at 28% (column g) and the long-term gain taxed at the new, more favorable rate(s) of 20%/10%. However, the long-term gain by itself is not broken out on the front of Sch.D. Now finishing Sch.D is simply a matter of following the directions. Do it slowly, double check your answers and then have a fresh set of eyes recheck again.

<<I'm obviously confused - I thought that you didn't pay capital gains taxes until you "cashed out"?>>

By now, you already know the answer to this. If the money was in an IRA, then you would be correct.
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