The impact mutual funds have on tax bills
Q. Is there any way to estimate what my mutual funds will give back in distributions so I can figure out what my tax bill could be?
— Planning for the IRS
A. You’re right that your mutual fund’s distributions could impact your tax bill.
That’s because mutual funds are required by law to pass their earnings on to the shareholders. Otherwise, those gains would be subject to corporate income and excise taxes, said Patricia Daquila, a certified public accountant with Lassus Wherley in New Providence.
She said if those taxes were paid, it would in turn reduce your total return.
“Although mutual funds buy and sell securities all throughout the year, the majority of mutual funds typically distribute capital gains once a year in mid- to late- December,” Daquila said. “However, some mutual funds may distribute more than once a year and earlier than December.”
The best way to estimate what the year-end distributions may be is to look at individual mutual fund web sites.
Daquila said the custodians will post the income and the short-term and long-term capital gains that are paid during the year, and some may provide an estimate of what the distributions are anticipated to be.
They will also post the income and capital gain distribution for previous years.
“The history can be helpful in coming up with an average of the distributions that were paid in the past,” she said. “However, because of market volatility, there is no guarantee that historical income or distribution averages would be repeated in the current year.”
Daquila said your fourth quarter estimated tax payment is not due until January 15, so you still have time to look at the custodian’s web site to determine what distributions were paid in 2015. From this, you can calculate your 2015 taxable income prior to making your estimated tax payment for the fourth quarter of 2015.
Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.