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After a tough year for the stock market, investors may not expect to receive an unexpected tax bill by the end of the year, experts say.
When the fund manager sells the underlying assets at a profit without a loss to liquidate, the profits are passed on to the investors. Investors are taxed on the profits when they receive it in the stock account.
When S&P 500 lower than 20% for 2022, most funds started the year with added value earlier, according to Morningstar. Some fund managers also sell income-generating assets as funds continue to transition from active to unregulated funds.
As a result, some investors may see a dividend payout agreement at the end of the year, 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 registered agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
While you will pay long-term capital gains tax rates of 0%, 15% or 20% for assets held for more than one year, you can also pay permanent capital gains tax for investments with less than year old.
Lucas said mutual fund payments often “slip under the radar” and need to be included as part of an investor’s year-end tax planning.
When you should expect to pay the bonus at the end of the year
Normally, individual fund payments occur once a year, in mid-December, after funds announce plans in late October or early November, Stephen Welch, research analyst and explained by Morningstar.
After you get a membership plan, you have until the “record date,” or the last day you have to file for a payment, to make an ownership change.
Morningstar News covers the current dividend plans for some of the larger funds, with more updates coming in mid-November.
Consider tax harvesting to reduce capital gains
Most investors don’t expect to distribute bond funds by the end of the year in 2021, said Jim Guarino, a CFP, CPA and managing director at Baker Newman Noyes in Woburn, Massachusetts.
“I know a lot of my clients are completely blown away,” he said.
But this year’s market downturn may offer a silver lining — an opportunity to recoup profits from losses, known as “tax carry forward” — assuming you know your full tax situation and act from the get-go. year, Guarino said.
“You have to build on that change,” he said, noting that it’s too late to reduce your income tax for 2022 as soon as you start receiving tax returns from vendors in January or February.