Every time you take money from a mutual fund account you're selling shares, and you have to report gain or loss from that sale on your tax return. Mutual funds do not have the reputation of being the most tax-efficient product, so you will need to plan carefully.
What do you need to know about mutual fund tax?
The most important thing to know about mutual fund taxes is that the mutual fund company will not pay taxes on your behalf. That’s your job. That means investors need to carefully monitor their accounts, and report all taxable distributions. This is done when you file your income taxes each year.
Mutual fund companies are responsible for sending you a Form 1099-DIV that summarizes the taxable distributions it made to you during the year.
Besides owing taxes on any personal capital gains when you sell your shares, you may also have to pay taxes each year on the fund's capital gains. That's because the law requires mutual funds to distribute capital gains to shareholders if they sell securities for a profit that can't be offset by a loss.
The good news? mutual funds tax doesn’t follow you after you die. Any money that is in your mutual fund upon your death will not be subject to any income tax.
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