With the end of the year quickly approaching, it's important to note that, normally in December mutual funds declare their annual capital gains and dividend distributions. All year long, fund managers are buying and selling stocks or bonds in the portfolios they manage and for tax purposes, all of those gains and losses that the funds recognize, have to be accounted for. So, in the last few weeks of the year, the funds declare their annual capital gain and dividend distribution.
There is nothing to worry about or even take into consideration, if you own mutual funds inside of a 401k, IRA or Roth IRA. But if you own funds in a taxable investment account either directly with a mutual fund family or inside of a brokerage account, these distributions will be reportable on a consolidated 1099 tax form. Here are a few considerations if you own mutual funds outside of a retirement account:
- 1. If you are considering investing, you may want to hold off until January to make that initial investment. If you were to invest $100,000 in a taxable mutual fund account in early December and the funds declare a 5% annual capital gain and dividend distribution at the end of the month, you could get an unexpected tax bill, even if your account lost value by year's end. That is a shocker that surprises many investors.
- 2. Tax loss harvesting - Once the funds declare their distribution, the share price of the fund drops as soon as they pay out the distribution. Here's an end of the year tax planning opportunity though. Let's say XYZ fund was priced at $10 per share, and they declare a $1 per share distribution. You would receive at 1099 reflecting the taxable distribution, but if the share price drops to $9, it may appear you have a capital loss on paper. In this case, you could do a swap from one fund to another that is very similar, to recognize the loss to help offset some of the taxable gains and not lose your place in the market. Just keep in mind you cannot sell something and immediately repurchase the same investment and declare the loss. That's called a "wash sale" and you would not be able to declare the capital loss.
- 3. Step up basis - on the subject of taxes, here is a little unknown fact. If you are married filing jointly, you can have up to a $98,000 capital gain for 2026 (including your other taxable income) and pay a 0% tax rate on a long-term capital gain (assets held over 1 year). Let's say, you live comfortably on social security and your total taxable combined social security for the year is $40,000. That would mean you could actually sell something with up to a $58,900 long term gain and pay $0 tax on the sale. In this case you could sell and immediately repurchase the same investment, since it's not subject to the wash sale rules and get an immediate step up in cost basis, so you would never pay tax on the repurchased value ever again.
I typically review all of the taxable accounts, that we manage, in the last two weeks of the year, looking for tax loss harvesting opportunities to help ease the tax burden. If you think any of these strategies may work for you, give us a call and we can talk about the best option for your situation.