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Ok To Buy Mutual Funds At Year End

- Alan Lavine and Gail Liberman

This year it is O.K. to buy mutual funds at year-end. In most years, it's not.

The reason: mutual funds distribute capital gains at year-end. So no matter when you purchased shares of the fund, you owe taxes on your prorated share of capital gains to the IRS.

We've had a bear market for three years. Stocks are down almost 40 percent since 2000. The funds are losing money on their investments. Many have capital losses. These losses are carried forward into the next year. The losses will offset any capital gains the fund earns in the following year. So you may pay little in capital gains tax distributions in 2003 if your fund does well.

Be sure to check with your fund group before you invest. Ask if it is carrying losses into 2003. Most growth stock funds are strapped with big losses. Next year, if the fund profits, you should not get hit with year-end taxes.

It's not too late this year to cut your tax bite. Here are a few tax tips you can review with your accountant.

  • Take investment losses against any gains. You can offset up to $3,000 in investment losses this year. If you have more, you can carry them over for next year's taxes.

  • Contribute the maximum amount to your pension plan. This will reduce the amount of your wages that are taxable.

  • Contribute to your IRA. You can contribute $3,000, plus another $500 if you are over age 50. If you are in the 27 percent tax bracket and contribute $3,000, you will save $810 on your taxes.

  • Consider prepaying your estimated state income tax balance for 2002 by year-end instead of waiting until April of 2003. You can also do the same thing with your property taxes.

  • Pay January's mortgage payment in December.

  • Consider donating stocks or bonds you have owned for years to charity. You can deduct the fair market value and pay not capital gains taxes. Or you could sell securities that are down in value. Then you can take the loss and give the money to charity.

Beware, you may not wish to use some of these tax-savings strategies if there's a chance you can be subject to the alternative minimum tax. So check with your accountant.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

To read more columns, please visit the column archive.

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