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After a rough year for the stock market, investors shouldn’t expect to receive a surprise tax bill after year-end mutual fund payouts, experts say.
When a fund manager sells the underlying asset at a profit without losses to offset it, those profits are passed on to investors. Profits are taxed to investors when they receive a brokerage account.
While S&P 500 Down more than 20% for 2022, according to Morningstar, many funds started the year with previously booked gains. And some fund managers have sold key profitable assets as money has shifted from actively managed to passively managed funds.
As a result, some investors may see mutual fund distributions at the end of the year despite the stock market’s losses in 2022, the report said.
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“It’s a double whammy,” said Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
While you owe long-term capital gains taxes of 0%, 15% or 20% on assets held for more than a year, you may also owe regular income taxes on investments held for less than a year.
Mutual fund fees often “fly under the radar” and should be included as part of an investor’s year-end tax planning, Lucas said.
When to expect mutual fund payouts at the end of the year
Typically, mutual fund payouts are made once a year, by mid-December after estimates are announced in late October or early November, explained Stephen Welch, managing research analyst at Morningstar.
Once you receive a mutual fund estimate, you have until the “record date,” or the last day listed for payment, to change ownership.
Morningstar’s report includes current allocation estimates for some large funds, with more updates coming in mid-November.
Consider tax loss harvesting to reduce capital gains
Jim Guarino, a CFP, CPA and managing director at Baker Newman Noyes in Woburn, Massachusetts, said many investors did not expect mutual fund distributions in 2021.
“I know a number of my customers were completely overwhelmed,” he said.
But this year’s market downturn may offer a silver lining — an opportunity to offset gains with losses, known as “tax loss harvesting” — as long as you know your full tax situation and take action before the end of the year, Guarino said.
“You have to build in that variable,” he said, noting that it’s too late to reduce your capital gains tax for 2022 after you start getting tax returns from brokers in January or February.