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Author: harmonyintouch Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121095  
Subject: Tax rates on Mutual Funds Cap Gains Date: 12/3/1998 3:26 PM
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OK, so I want to sell some of my Mutual Funds in order to invest that money in stocks. I know that the Funds must pay out the capital gains before the end of the year to holders of the funds. I am in the 15% tax bracket, and don't expect these gains to push me up into a higher bracket, (but it is possible). If I sell the funds before the end of the year, to avoid the Cap gains pay out, aren't I going to have to pay the same taxes on them anyway because I will have sold the Funds and realized LT cap gains from the sale? Based on this concern, is ther any advantage in selling the Funds before year end?
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6732 of 121095
Subject: Re: Tax rates on Mutual Funds Cap Gains Date: 12/3/1998 8:30 PM
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[[OK, so I want to sell some of my Mutual Funds in order to invest that money in stocks.]]

Great. Welcome to the party!!

[[ I know
that the Funds must pay out the capital gains before the end of the year to holders of the funds.]]

That's correct...

[[ I
am in the 15% tax bracket, and don't expect these gains to push me up into a higher bracket, (but
it is possible). If I sell the funds before the end of the year, to avoid the Cap gains pay out, aren't I
going to have to pay the same taxes on them anyway because I will have sold the Funds and
realized LT cap gains from the sale?]]

Very likely, yes. It's obvious that you understand the relationship between the dividend pay out and the NAV of the funds. Once the dividends are declared to owners of records, the NAV of the fund immediately drops to reflect that reduction in the value of the fund. So, one way or the other, you are going to get hit.

[[ Based on this concern, is ther any advantage in selling the
Funds before year end?]]

Potentially, yes. If you have held the funds for more than one year, you'll get long term capital gain treatment on the sale of the actual shares of the fund (with a preferred 10% tax rate). But it is very likely that the much (most?, all?) of the dividend distribution that you'll receive will be SHORT TERM capital gains, taxed at your 15% rate.

So what you need to do is contact the mutual fund company, find out the dividend date, make sure that you aren't already too late, and try to find out how much (approximately) of your dividend pay out will be short term or long term.

Or, if the amounts involved are so small, you might simply consider selling the fund before the dividend date just to be on the "safe" side. That'll at least allow you to control your capital gain destiny.

Hope this helps...
TMF Taxes
Roy

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