J.K. Lasser's Your Income Tax 2014: For Preparing Your 2013 Tax Return

Chapter 32

Tax Rules for Investors in Mutual Funds

32.1 Timing of Your Investment Can Affect Your Taxes

32.2 Reinvestment Plans

32.3 Mutual-Fund Distributions Reported on Form 1099-DIV

32.4 Tax-Exempt Bond Funds

32.5 Fund Expenses

32.6 Tax Credits From Mutual Funds

32.7 How To Report Mutual Fund Distributions

32.8 Redemptions and Exchanges of Fund Shares

32.9 Basis of Redeemed Shares

32.10 Comparison of Basis Methods

As a mutual-fund shareholder, you may receive several types of distributions, such as ordinary dividends, capital gain distributions, exempt-interest dividends, and return of capital distributions. The rules for reporting the different types of distributions are discussed in this chapter.

The tax law provides different methods of identifying the particular shares being sold when you sell a portion of your mutual fund holdings and of determining the cost basis of those shares. You may be able to use these methods to obtain a preferred tax result on the sale.

32.1 Timing of Your Investment Can Affect Your Taxes

You may buy a tax liability if you invest in a mutual fund that has already realized significant capital gains during the year. For example, if a fund is about to make a year-end capital gain distribution and you invest shortly before that, you will in effect have to pay tax on the return of your recently invested money.

You will be eligible to receive a forthcoming dividend or capital gain distribution if you are a shareholder of record on the “record date” ...