The stock market reached record highs this year, and many believe the bull has more room to roam. But if you’re ready to jump back into stocks, consult your calendar before you start pouring more money into the market. Buying mutual funds between now and the end of the year could trigger an unnecessary tax bill.
Sometime in December, many funds pay out dividends and capital gains that have built up during the year, and the payout goes to investors who own shares on what's known as the ex-dividend date. It might sound like a savvy move to buy just before that day so you get a whole year's worth of income. That's not how it works, though.
Yes, you'd get the payout, but at the time of the payout, the share price falls by exactly the same amount. If you get $2 a share in dividends, for example, the share price drops by two bucks. In effect, the fund is simply refunding part of your purchase price.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But the IRS doesn't see it that way. You have to report the payouts as income on your 2013 return -- and pay taxes on them -- even if the money is automatically reinvested in extra shares. (The tax threat does not apply to mutual funds held in 401(k) plans or other tax-deferred retirement accounts.)
Before you buy shares for a nonretirement account in December, call the fund company or check its Web site to find out exactly when the dividend will be paid so you aren't buying a tax distribution.
Buy after that date and you'll not only get a lower price, but you'll also avoid a tax bill. If you buy before and get stuck with the tax bill, there is one consolation: You'll have a higher tax basis . . . and a lower tax bill when you ultimately sell the shares.
-
FSA Contribution Limits Are Higher for 2025FSA A flexible spending account allows you to build tax-free savings for certain medical expenses.
-
Florida Tax Deadline Extension: What You Need to KnowTax Relief The IRS extended federal tax return file time due to severe storms.
-
IRS: Here’s How to Recover Your Tax Records After a Natural DisasterTax Records Your tax documents can help you get federal relief faster, the IRS says.
-
Voters Approve New Veteran Property Tax ReliefTax Relief Thanks to the election, some Veterans will soon see expanded property tax exemptions.
-
Nevada Approves Diaper Tax Relief Amid Childcare CrisisTax Relief Nevada voters have expanded sales tax relief to diapers. But are prices still too high?
-
Earned Income Tax Credit (EITC) 2024: How Much Will You Get?Tax Credits The refundable amount for workers with or without children is slightly higher this year. Here’s what you need to know.
-
Two Consequential Tax Cases You May Not Have Heard AboutThe Supreme Court's decisions in these cases create uncertainty about challenging IRS regulations and guidance. Expect more litigation to follow.
-
IRS Expands Tax Breaks for Breast Cancer Screenings, ContraceptivesHealthcare Now you can get a tax deduction or reimbursement for certain medical expenses, like over-the-counter birth control and condoms.
