Chapter 18. The Taxing Side of Mutual Funds

In This Chapter

  • Checking out Form 1099-DIV and distributions from mutual funds

  • Understanding the issues of selling funds

  • Browsing Form 1099-R and retirement fund withdrawals

You invest in mutual funds to make money. But guess who starts licking his chops when he hears about money being made? That's right: good ol' Uncle Sam. And state governments, too. (In Chapter 17, I explain the different ways that mutual funds can make you money: either through distributions (capital gains and dividends) or through appreciation. If the fund that made the money is being held outside a tax-sheltered retirement account, federal and state governments will demand a portion of your fund's distributions and of your profits when you sell shares in a fund for more than you paid for them.)

Once each year, the mutual fund companies or brokerage firms where you're holding funds send you one or more tax forms that tell you how much taxable money you made on your mutual funds held outside of retirement accounts. (Remember, you don't need to file anything with funds held inside retirement accounts.) Come April (or whenever you get around to completing your tax returns), you must transfer the information on these fund-provided tax forms to your income tax return, where you calculate how much tax you actually owe on the money you made from your mutual funds.

If you cringed when you read the words tax forms, you've obviously battled these ugly beasts. I sometimes wonder if ...

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