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Despite stock market losses, investors may get year-end mutual fund payouts.
That can trigger a surprise tax bill.
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Despite stock market losses, investors may get year-end mutual fund payouts.
That can trigger a surprise tax bill.
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DESPITE STOCK MARKET LOSSES, INVESTORS MAY GET YEAR-END MUTUAL FUND PAYOUTS.
THAT CAN TRIGGER A SURPRISE TAX BILL.

Published Mon, Nov 7 20222:40 PM EST
Kate Dore, CFP®@katedore
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Key Points
 * Despite stock market losses in 2022, investors may receive year-end mutual
   fund distributions, which can trigger a tax bill.
 * Typically, mutual fund payouts happen once per year, by mid-December, after
   funds announce estimates in late October or early November.
 * However, investors may reduce capital gains through tax-loss harvesting, or
   using losses to offset profits.

courtneyk | E+ | Getty Images

After a rough year for the stock market, investors may not expect to receive a
surprise tax bill from year-end actively managed mutual fund payouts, experts
say.

When a fund manager sells underlying assets at a profit without losses to offset
it, those gains are passed along to investors. The profits are taxable to
investors when received in a brokerage account.



While the S&P 500 is down more than 20% for 2022, many funds started the year
with previously embedded gains, according to Morningstar. And some fund managers
sold profitable underlying assets as money has continued shifting from active to
passively managed funds.

As a result, some investors may see year-end mutual fund distributions, despite
stock market losses in 2022, the report found.

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“It’s a double whammy,” said Tommy Lucas, a certified financial planner and
enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

While you’ll owe long-term capital gains taxes of 0%, 15% or 20% for assets held
for more than one year, you may also owe regular income taxes for investments
owned for less than one year.



Lucas said mutual fund payouts often “slip under the radar” and need to be
included as part of an investor’s year-end tax planning.




WHEN TO EXPECT YEAR-END MUTUAL FUND PAYOUTS

Typically, mutual fund payouts happen once per year, by mid-December, after
funds announce estimates in late October or early November, explained Stephen
Welch, a manager research analyst at Morningstar.

After receiving a mutual fund’s estimate, you have until the “date of record,”
or the last day to be listed for a payout, to make ownership changes.

Morningstar’s report covers current distribution estimates for some of the
larger funds, with more updates coming in mid-November.


CONSIDER TAX-LOSS HARVESTING TO REDUCE CAPITAL GAINS

Many investors didn’t expect year-end mutual fund distributions in 2021, said
Jim Guarino, a CFP, CPA and managing director at Baker Newman Noyes in Woburn,
Massachusetts.

“I know that a number of my clients were just absolutely blown away,” he said.

But this year’s market decline may offer a silver lining — the opportunity to
offset profits with losses, known as “tax-loss harvesting” — assuming you know
your complete tax situation and take action by year-end, said Guarino.

“You’ve got to build in that variable,” he said, noting that it’s too late to
reduce your capital gains taxes for 2022 once you start receiving tax forms from
brokers in January or February.

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