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Tax on Investments

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JamesKim
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Tax on Investments  Reply with quote  

I've read a few articles about Mutual Fund Taxes. I get the idea of it, but I'm still confuse on how it gets tax and how I could reduce it.

My question is:

1. How does mutual fund get taxed?

2. How do you minimize the tax?

Does the state or company give you a form on how much you've profited or loss? And if you acquire a loss, do you still have to pay tax?

Thanks
Post Tue Mar 11, 2008 11:15 pm
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efflandt
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Mutual funds trade stocks, bonds or other things which may result in capital gains, dividends, etc. that are passed on the holders. These are typically reinvested in additional shares of the mutual fund. But those gains, losses or dividends are reported on a 1099 to the IRS and have a tax liability to you that year, but long term gains and dividends may be taxed at a lower rate than short term gains.

It is up to you to keep track of cost basis for shares purchased and added through reinvestment of capital gains and dividends. You will need that information when selling shares, although, mutual funds are somewhat easier than stocks, since you can use your average cost basis.

The tax that is due is the tax that is due, you cannot do anything about that except to pay attention to the turnover rate of funds you invest in. You can select tax advantaged mutual funds or index funds that do minimal trading If you do not keep accurate records, the IRS may think that more tax is due than you can properly account for.

None of that is an issue with a qualified retirement account like IRA or Roth IRA, since tax on an IRA is just based on distributions and any pro-rated taxable contributions, or Roth IRA distributions are untaxed if already taxed contributions or "qualified" gains.

Something that can be disappointing for a mutual fund in a taxable account is if its value per share goes down, but you still end up paying capital gains tax due to churn (trading within the fund).
Post Tue Mar 11, 2008 11:50 pm
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coaster
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I think the most common mistake made is not keeping track of cost basis. I enter all transactions into a spreadsheet (several sheets, actually) so that when tax time comes around I don't have to scramble and try to decipher all my statements to figure my gains, losses, and income.

James....losses aren't taxed. At least the government hasn't yet figured out how to tax something you don't have. Laughing Investing losses can be deducted from investing gains and also from ordinary income up to $3000 per year.

You get a 1099 form from your mutual fund companies and/or securities brokers for your dividend and interest income, and for mutual fund distributions. This number is reported to the IRS. You also get another form called a 1099-B that lists your transactions for the year. This is not reported to the IRS. However, you're responsible yourself for listing all securities sales along with the corresponding cost and sales proceeds for each on Form 1040 Schedule D.

~Tim~
Post Wed Mar 12, 2008 4:37 am
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urvi88
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quote:
Originally posted by coaster
I think the most common mistake made is not keeping track of cost basis. I enter all transactions into a spreadsheet (several sheets, actually) so that when tax time comes around I don't have to scramble and try to decipher all my statements to figure my gains, losses, and income.

James....losses aren't taxed. At least the government hasn't yet figured out how to tax something you don't have. Laughing Investing losses can be deducted from investing gains and also from ordinary income up to $3000 per year.

You get a 1099 form from your mutual fund companies and/or securities brokers for your dividend and interest income, and for mutual fund distributions. This number is reported to the IRS. You also get another form called a 1099-B that lists your transactions for the year. This is not reported to the IRS. However, you're responsible yourself for listing all securities sales along with the corresponding cost and sales proceeds for each on Form 1040 Schedule D.

Thanks for sharing such good information, it helps me a lot.
Post Thu Jun 25, 2009 6:42 am
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Krystal Kacey
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You may be able to take advantage of a variety of tax–deferred investments that allow you to accumulate earnings on which you owe no tax until you begin withdrawing money, usually after you retire. Many companies sponsor tax–deferred retirement plans, such as 401(k)s, for their employees. Or you may qualify to open an an IRA or other individual plan.

grand opening There are usually contribution limits on the amount you can invest each year in tax–deferred plans. But sometimes the amount you invest is also tax deductible, saving you even more. And with a Roth IRA, although you're not allowed to deduct the money you put into it, the money you take out is completely tax free, provided you follow the rules for withdrawal.
Post Sat Sep 19, 2009 5:28 am
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itrademax
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minimized the investment tax  Reply with quote  

as he said, the most common mistake made is not keeping track of cost basis. I enter all transactions into a spreadsheet (several sheets, actually) so that when tax time comes around I don't have to scramble and try to decipher all my statements to figure my gains, losses, and income.
Manually calculate gains and losses may waste a lot of your time, now i use the tax software -- TradeMax to solve this problems..

Trademax is a full featured tax software specifically designed for active investors or traders to manage their trade data to maximize their gain/loss strategy, prepare their Schedule D. It can import trade data from most format data files, monitor realized/unrealized gains & losses for current positions, adjust wash sales events, report capital gains/losses in printed Schedule D format or export to popular tax software such as TaxCut and TurboTax.
Post Mon Dec 28, 2009 10:30 am
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oldguy
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quote:
And if you acquire a loss, do you still have to pay tax?


James - when you have a loss you 'harvest' it. Eg, say that you lose $10,000 on a fund. You sell it and 'book' the loss. Then you use the loss to offset gains on other investments - you would sell enough of a profitable fund to 'book' a $10,000 profit. So the $10,000 loss cancels the gain - and no tax is due.

I have also used this when I sell a rental house - the house gives me a large taxable gain - so I look for losses that I can harvest to offset my profits.

Of course, what I really want is big profits on both - and I want to pay LOTS of taxes - I've learned that I never lose money when I am paying lots of taxes Laughing
Post Mon Dec 28, 2009 3:42 pm
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Scrutnizer
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I'm self employed, but aside from my business income, I have personal investments, which have produced gains of about $20K in 2007. Do I need to pay SE tax on that or just my business income? Thanks for your help.
Post Mon Jan 04, 2010 9:58 am
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coaster
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Any time you sell something, you pay tax on the difference between what it cost you and what you sold it for. You don't pay tax on something you still own. Your sales of stocks, bonds, mutual funds, etc produce capital gains which are reported on IRS form Schedule D and that adds to your Adjusted Gross Income. Your Self Employment Tax is taken out of your self-employment income, which is reported on Schedule C and the net of Schedule C adds to your AGI.

That's the long answer.

The short answer is "no" Laughing

~Tim~
Post Mon Jan 04, 2010 3:16 pm
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Elmira Nancy
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What are the federal income tax rates? I'm talking about investments. I heard there's one tax rates on savings account, a different tax rate on short term capital gains, a different tax rate on long term capital gains, another tax rate on dividends, and so on. Is there a chart somewhere that shows these rates so I can consider tax consequences of how I invest my money?

http://www.homestead-llc.com
Post Mon Jan 11, 2010 7:42 am
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coaster
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Net long-term capital gains are taxed at capital gains rates; short-term capital gains and interest and dividend income are taxed at ordinary income rates. The exact rate depends on the adjusted gross income.

~Tim~
Post Mon Jan 11, 2010 4:41 pm
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chrisgayle
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Long term capital gains receive favorable tax treatment. Holding assets in taxable accounts for more than 1 year can significantly lower your tax bill.
Post Fri Jul 15, 2011 6:52 am
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coaster
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Investment decisions should not be made out of tax consideration. For instance, holding a losing position in order to qualify for long-term status is foolish.
Post Fri Jul 15, 2011 4:46 pm
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