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Watch Out For Covert Capital Gains!
Hey all you smart mutual fund investors, listen up! Check your
accounts on line now, or call your broker or investment company,to see
if your fund issued any capital gains this month. That's right, even
though your fund's value probably took a nose dive, there very well may
have been trading in that fund throughout the year that could have
resulted in a capital gain. Mutual funds distribute the bulk of such
gains during December to their shareholders, so you COULD owe income
tax on capital gains even though your fund is sporting a big fat loss,
or even a mild-paunchy loss...You see, when a lot of novice or
nervous investors call 1-800-REDEEM (that's a joke, not a real number
to my knowledge) fund managers have to raise enough capital by 4pm EST
each day of trading to satisfy all the redemptions. Well, quite a few
savers sold out of mutual funds when the markets started declining.
(Generally it's savers, not investors, that panic and sell prematurely
incidentally.) So, quite a few mutual fund managers had to juggle
their portfolios, invariably selling out securities that had built-in
capital gains. Yes, I know, a distant memory...over 6 months ago,
even...but I digress.If the mutual fund manager wasn't able (or
interested) to offset those gains with losses, there may have been an
excess of gains over losses, resulting in us shareholders having to
declare a portion of those gains on our individual income tax returns. Here's
an example: Your mutual fund issued a gain to your account in mid
December totalling $1,000. Look through your portfolio (as I mentioned
in my earlier blog today) for a security whose value is at least $1,000
less than your basis (fancy term for what you paid for it, including
all reinvested dividends, if applicable) and sell that security booking
a $1,000 capital loss. Your losses offset your gains (for the most
part it's that simple, although long-term capital losses-securities
held one year and one day--offset long-term capital gains, and
short-term capital losses--securities held less than one year and one
day--offset short-term capital gains). Finally, the federal
government allows you to deduct an additional $3,000 in excess of all
offsetting capital gains and losses each year against ordinary income.
If you have more than $3,000, you get to carry the excess forward to
future tax years. Some states follow the feds in the unlimited
carryforward of capital losses, New Jersey, however does not. Check
with your CPA for details on this, to be sure, if you expect heavy
losses in 2008.At the end of the day, its the end of the year.
No sense in paying unnecessary income taxes. So, while you did not
actively sell any securities this year to produce a capital gain, you
may be an unsuspecting shareholder who DID receive a capital gain.
There's still time to avoid paying tax on that by "booking;/realizing"
an equal dollar capital loss, or even quite a bit more than the amount
of capital gains, and deducting your $3,000 excess on your 2008 return
and pushing the balance forward. Yes, Ms. Dubious, there WILL be
capital gains in your future, and they JUST might start in 2009!
You'll be prepared however, with perhaps an ample supply of carried
forward capital losses so you won't have to pay taxes till they're all
used up. Now THAT'S planning, and THAT'S effective planning. Consult
your broker and/or CPA for details. (Most likely your fee-only
financial planner has already contacted you and handled this for you.)
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