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Mutual Fund Tax Advices

In order to make the most of your mutual fund in tax terms, you should be well-acquainted with the tax regulations that are incorporated. Therefore, consider the following advices in order to avoid paying more taxes on your mutual fund than needed.

Mutual Fund Tax Advice 1:

In order to determine the cost of your shares, select the most tax advantageous way.

When you sell the shares you possess in a mutual fund you are subject to capital gains tax. There are several ways by which you can determine your cost basis.

  1. Average Cost - Single Category Method

    In order to get the average cost per share, you should sum the cost of all shares that you have purchased and divide it by the number of all shares.

  2. Average Cost - Double Category Method

    By using this method you should calculate two average costs:

    • For long-term shares
    • For short-term shares
  3. First In First Out (FIFO) Method

    Under this method the assumption that the first shares you have purchased will be the first to be sold is made.

  4.  Specific Share Identification

    Gives you the opportunity to select the individual shares you want to sell.

Mutual Fund Tax Advice 2:

Don't throw away the supporting documentation.

Keep the reports you have been sent by the mutual fund in order to have a source of verification for the share prices and other information, since you may possess funds that have been with you for longer periods of time.

Mutual Fund Tax Advice 3:

Remember to include the dividends you have reinvested in the cost of your investment.

The automatic reinvestment of dividends leads to the increase in the share cost, which leads to an increase in your cost basis. As a result you will be subject to fewer taxes when you decide that it is time to sell the mutual fund shares.

Mutual Fund Tax Advice 4:

Use the check writing privileges provided by money market funds, and avoid those provided by other types of mutual funds.

You may trigger a taxable event if you write a check against your bond fund account. Additionally, for recordkeeping purposes, you should avoid writing too many checks.

Mutual Fund Tax Advice 5:

When you transfer from one mutual fund to another, you should examine the corresponding tax implications.

Since the transference from one mutual fund to another represent the selling of the shares of the first and the purchase of shares of the second, you will most probably be subject to taxation.

Mutual Fund Tax Advice 6:

In case you are about to execute a big sale, examine your withholding or estimated tax payments.

It is highly recommended to address your company payroll department when you are about to execute a large sale. They should be able to adjust your withholding in order to accommodate the subsequent taxes you will be liable to. You can also make an estimated tax payment, which will allow you to cover the additional taxes.

Mutual Fund Tax Advice 7:

Advice 7: Make sure that you know the dates of the year-end distributions.

In order to avoid paying taxes on an investment made, it is recommended not to purchase fund's shares after the year-end distributions date.

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