Check It Off Your List

December 1st 2015, by Lyle E. Hershey

As we enter the final month of the year, I am guessing that you probably have a lot of things you need to get done. I can imagine that a number of lists have your attention. I’m sure there are things on your list related to the Christmas season like the Christmas present list, the prepare the house for Christmas to do list, and the holiday gathering list. Many of us have work and home project lists that we are working hard to complete by year-end.  With all of the other things going on, you are probably not highly focused on taxes and tax planning. It’s not my intention to increase your already heightened stress level; however, I thought it could be helpful to provide a little year-end related tax information.

This year in particular is a good year to review mutual fund taxation. Mutual funds are pass through entities for capital gains tax purposes. This means that when the mutual fund has transaction activity in a given year that creates capital gains, those gains are passed along to the investors. The investors get a 1099 from the mutual fund company for their portion of the capital gain. When the mutual fund transaction activity in a given year results in a net loss, the mutual fund retains those losses to offset future capital gains and no 1099s are sent to the investors.

During 2008 and 2009 when the stock market was down, many mutual funds built significant retained losses. Since the stock market has generally been up after that time, those losses have for the most part been eliminated, and many mutual funds have accumulated unrealized capital gains. In recent years the mutual fund capital gains pass through has been nothing or very modest. This year might be different. Some mutual fund investors could see a sizable capital gain pass through in a year where their mutual fund returns are low and possibly even negative.

Now is a good time to consider any possible benefits from year-end tax planning strategies. Some of the typical items to consider are both cash and stock charitable giving, additional company sponsored retirement plan contributions, investment holding loss and gain harvesting, and Roth IRA conversions. Depending on your current financial situation, you might benefit from one or more of these strategies.

Hopefully, a little reminder about how mutual fund taxation works can relieve a little frustration if you find a 1099 in your mail box from a mutual fund with disappointing 2015 performance.  Many of us face enough stressful challenges in our daily living. The team at Master’s is here to help you manage some of the financial stress so you have one less thing on your list.