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Subject:  Re: Taxes on mutual funds, IRAs Date:  10/26/1997  2:27 PM
Author:  TMFPixy Number:  539 of 90548

Greetings, Scott, and welcome to Fooldom.

<<1. I've got a mutual fund where the quarterly dividends are automatically re-invested. If I don't see that money in 1997, do I still have to pay taxes on it?

2. If I don't sell any shares in 1997, would I still have to pay a capital gains tax? I thought you only paid that tax when you sold shares for a profit.

3. If I sell all the shares in the fund at one time, how does that affect my tax return? It makes sense that I would have to pay taxes on the 'profit' that I made due to the increased share price but are there any other things I should be aware of? When do I pay the taxes on the dividends? In the year that I receive the dividends (in the form of additional shares) or when I sell those additional shares?

So the tax benefit between an IRA and a non-IRA fund is that with the IRA, you don't have to pay taxes each year on the dividends that were paid that year, right? You pay taxes on the dividends in an IRA only after you starting making withdrawals >>

You will pay taxes on both capital gains and dividend income earned by the fund and reinvested by you during the year. The amount of both will be reported to you and to the IRS on a Form 1099 issued by the fund after 12/31/97. You should get that form by 2/15/98 to enable you to declare it on your taxes.

You'll pay taxes on capital gains earned by the FUND during 1997. The fund sold individual securities during the year, thus generating reportable gains (or losses). By law, even though you sold none of the fund shares YOU hold, the fund's sale of securities IT held gave rise to this reporting requirement. By law, the fund must pass on these profits (or losses) to you, and you must report same on your tax return.

If you sell all of the shares in the fund at once, you will have a reportable gain (or loss) based on your original purchase price(s), the selling price, and the holding period. Short term and long term gains (or losses) are based on the length of time between your purchase and the date of sale.

You and you alone - not the fund - are responsible for knowing these things, so it's absolutely mandatory you learn something about them. I'll second Kmannion and 4play in suggesting you peruse some of the posts in the Tax Strategies folder, read some of the FAQs on these issues written by TMF Taxes, and also contact your fund. This time of the year the better fund families usually provide shareholders a tax guide that should prove beneficial reading to you on this topic.


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