(The fund does pay out dividend distributions.)You might also consider tax-managed funds, which try to offset capital gains with capital losses, minimizing distributions.

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"You'll end up being taxed for income and gains earned over the full year." Basically, you'll be buying a tax bill when you buy fund shares.

Incidentally, when the fund pays out the distribution, its share price drops by that amount.

Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner.

See Adjusted Basis under Basis of Partner's Interest, later. A partnership generally does not recognize any gain or loss because of distributions it makes to partners.

And if you invest in a Roth IRA, you wouldn't pay taxes on gains and distributions at all, assuming you followed the rules for withdrawal at retirement.

But putting stock-fund shares into an IRA to avoid taxable distributions might be creating a bigger tax bill down the road.

But you have plenty of ways to reduce your fund taxes, most of which do not involve silver bullets, garlic or splattered brains. Suppose, for example, the entirely fictional Miskatonic River Fund gave you a long-term capital gains distribution of 6. (If you're in the highest tax bracket — 39.6% — you'll owe 20% on your capital gains.

Mutual funds buy and sell securities all year, and when they have more gains than losses, they pass those on to you, around this time of year. You'll also owe an additional 3.8% Medicare tax, which kicks in at 0,000 in modified adjusted gross income for joint filers, and 0,000 single filers.)Don't buy a mutual fund near the dividend date," says Don Zidik, director of individual trust and estate practice at Braver PC, in Needham, Mass.

30 record, would distribute 18 cents per share in short-term capital gains, .765 per share in long-term capital gains, and nothing in income.

Over time, taxable distributions reduce your returns.

Most fund companies provide an estimate of their capital gains and income distributions.