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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: of 121095  
Subject: Re: another mutual fund question Date: 4/10/1998 10:13 PM
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[[Thanks ...I think I am finally starting to understand all this ...another point...if I have the dividends
paid to me directly, I will still eventually have to pay ordinary dividend interest on this money at tax
time, correct? So either way does it really matter which way I do it?]]

From a pure tax standpoint, it makes no difference. You'll be assessed tax on the dividend distributions regardless of if you take the distributions, or reinvest them. If you take them, you'll not have to deal with the problem of adjusting your basis for the reinvested dividends.

[[ Also....Besides the obvious reasons why people buy mutual funds(having other people handle your
money) why would someone want to pay cap gains taxes every year thru the fund and then again
when we sell the shares of the fund? Aren't we actually being taxed twice on the same money or am
i missing something?.]]

Nope. When you reinvest the shares, you are buying additional shares at new prices. So your basis in the fund is increasing everytime your dividends are reinvested. So you are only paying tax on the distributions once.

Have you read IRS Publication 564 yet? It really does explain these issues pretty well.

TMF Taxes
Roy

SPECIAL NOTE: I try to answer as many questions as I can each week, and I generally select those that have not been asked before. If you don't get a detailed answer to your question, it is probably because my time is so limited during tax season, or because it has already been asked and answered in this folder in the past, or because it has been discussed in the Taxes Frequently Asked Questions area. In order to visit the Taxes FAQ area, go to the Fool's School area (http://www.fool.com/school.htm) and check out "Other Features" in the list box, OR you can jump directly to the Taxes FAQ area (http://www.fool.com/school/taxes/taxes.htm). Additionally, if any references were made to the IRS Web Site, you can get there by pointing your web browser to (http://www.irs.ustreas.gov)
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