Tougher Tax Times Ahead for Mutual Fund Investors

April 20, 2007

The Chicago Tribune reports that taxes paid by mutual fund investors, muted for years by the big losses of the early 2000s, are set to rise again:

The opportunity is fading for your fund manager to offset capital gains from selling winners in the fund portfolio with losses from having sold losers during the market tumble earlier in the decade.

'The last four years, we have been on a tax holiday of sorts, and the party is over,' said Tom Roseen, senior research analyst at fund tracker Lipper, a unit of Reuters.

The stock market advance since late 2002, combined with higher interest rates and increased dividend payments by many companies, swelled the amount of capital gains and income distributions paid by mutual funds to their investors.

Moreover, the turnover of portfolios, as active managers buy and sell in an effort beat market benchmarks, has increased.

As a result, Lipper, in a 114-page report issued this week, estimates that taxable-mutual-fund investors, who hold funds outside tax-deferred savings accounts, such as IRAs and 401(k)'s, saw a 56 percent increase in taxes from 2005 to 2006, to $23.8 billion.

Most mutual fund investors reinvest income and capital gains. But they still must pay the tax, even though they have a buy-and-hold investment strategy, Roseen said. So-called tax loss carry-forwards from the years of the market slide are being used up or expiring, he noted. They expire seven years after the date of the sale."