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Stocks and Taxes

How Will Stocks Affect Your Taxes 

I have been meeting lots of people lately that are frustrated by all the additional taxes that they have to pay from owning mutual funds last year. Some who argue it’s a nice problem to have because it normally means that you made money, but  people are asking us for help as they didn’t hear anything from their existing advisers on this issue.

However, mutual funds have several potential drawbacks, such as they distribute their gains and income distributions throughout the year to their shareholders. Particularly frustrating was that many people are reinvesting their distributions into more shares, or weren’t planning on using their mutual funds anytime soon! “I didn’t use the money, so why do I have to pay taxes?” “It’s for retirement, why do I have all these extra taxes?”

Remember that last year was a very big year in the stock market, with many mutual fund managers aggressively trading their portfolios to lock-in gains, etc. Remember this simple rule: 

When your mutual fund manager trades the portfolio, it generates potential taxes!! Unfortunately, it doesn’t matter if you reinvested those gains or the dividends because you benefitted, thus you owe potential taxes!!

Stocks can and often will affect your taxes. Whether you earned a capital gain, a

capital loss, or only earned dividends on your investments, you still may owe

money come tax season.  

Financial advisers should be able to briefly explain the tax information to you,  educating you on potential tax risks. I have heard many financial advisers joke, “but you made money, so why are you complaining?” Because unplanned for tax events cost money, and if you were caught off guard with an unexpected tax bill, can be very stressful and expensive!

Remember, it’s always better to be prepared come tax season. Keeping track of your average costs basis, year-end statements or 1099’s can be really useful to have to help sort all of this out. Caveat Emptor…”buyer beware!”

Pat Moran is managing partner for Healthier Money and has 35 years helping people with their finances. He can be reached at (602) 571-1035

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