How to Lower Your Mutual Fund Taxes

Mutual fund taxes are more complicated than those of just about any other investment around, so figuring them out can be one of the most tedious things you've ever done. Unfortunately, if you don't pay attention, getting something wrong could be the most costly investment mistake you ever make—so no fair skipping this article if you have mutual funds!

The main difference with taxes on mutual funds is that you pay taxes on your capital gains and dividends every year–whether or not you sold any of your shares—while with stocks, you don't pay taxes on your gains until you sell your shares.

There are three taxable events when it comes to mutual funds: selling your shares, receiving dividends and receiving capital gains distributions. There's no way to get around paying taxes every year on any capital gains distributions and dividends (even if you automatically reinvest them). At the end of the year, the mutual fund family will send you a Form 1099-DIV that lists the dividends, interest, or capital gains for the year–all the information you need for your taxes.

Dolan Smart Money Moves: You can try to lower your taxes and prevent a migraine come tax time by following these rules of thumb: