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Reduce your mutual fund investments’ tax burden with research and meticulous record-keeping.
Distributions from mutual funds, even if reinvestment, are considered taxable income. Shareholders of a mutual fund are viewed by the IRS as if they held the same number of shares in the fund’s underlying securities. To that purpose, shareholders must pay taxes on all interest, dividends, and capital gains generated by the sale of securities in their portfolios. Discuss your case with an experienced Sanford, FL tax planning specialist.
Refunds That Are Taxed
Ordinary dividends and capital gain distributions are the two payouts that must be reported and taxed.
- Simple Dividends. The net earnings of a mutual fund are distributed to shareholders in the form of ordinary dividends. These dividends and interest are earned by the fund’s holdings in various securities. Common stock dividends are distributed regularly to stockholders. Dividends from mutual funds can go down or up yearly, just like the return on any other investment, depending on the fund’s performance relative to its investment objective. You need to disclose dividend payments on your tax return as ordinary income.
- Dividends that meet the criteria are considered qualified. It’s important to note that qualified dividends are simply ordinary dividends that are taxed at the same rates as long-term capital gains. Qualified dividends can be distributed by mutual funds as long as the fund receives qualified dividends and distributes at least 90% of those dividends to shareholders. When a foreign company’s stock or ADRs are traded on U.S. exchanges, or U.S. tax treaties cover the dividends, the dividends are considered qualified.
- Profit sharing. Distributions to shareholders occur when the fund’s gains from the sale of securities surpass its losses. These capital gain distributions fluctuate in size from one year to the next, just like regular dividends do. Regardless of how long you’ve held your fund shares, they will be taxed as a long-term capital gain. Any profit made on the sale of shares in a mutual fund could be considered capital gain.
Interest in capital gains
Only profits on shares held for more than a year are eligible for the preferential long-term capital gains rates on sales of mutual fund shares. Gains from the sale of shares held for a year or less are considered “ordinary income,” whereas gains from the sale of stocks held for more than a year are considered “long-term capital gains.”
Although the capital gains and dividends tax rates in 2022 are unchanged from those in 2021 (0%, 15%, and 20%), the threshold amounts no longer align with the new tax bracket structure.
