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Avoid double tax on reinvested capital gains

by on
in Employment Law,Human Resources

Q. In a recent publication, you mentioned that you should avoid double taxation on mutual fund dividends. Does that rule also apply to capital gain distributions? R.D., via e-mail

A. Yes. The Form 1099s you receive from mutual fund companies list both the dividends and capital gains distributions for the year. Those amounts are subject to current tax even if you did not sell any shares. If the dividend and capital gain amounts are automatically reinvested, you should adjust your basis upward to reflect the fact that you’ve already been taxed on those amounts. Otherwise, you’re paying a double tax when you finally sell the shares.

Tip: A Form 1099 will also separate qualified dividends from ordinary dividends. Generally, the maximum tax rate on qualified dividends and capital gains is 15 percent.

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