Tax Planning with Mutual Funds

10 ideas to maximize the benefits of your investments Category: Planning

Far more individuals are invested in the stock market through mutual funds than in the past. This phenomenon is due in part to the creation of many forms of tax deferred retirement savings programs such as IRAs, Roth IRAs, company sponsored 401(k) and 403(b) plans. But mutual funds also benefit from the long-standing belief that they allow investors to diversify their holdings without buying individual stocks. From a planning viewpoint, here are some great mutual fund tips. These tips assume your mutual fund investment is NOT in a retirement account unless noted.

1.	Recordkeeping: Keep good records of every transaction. While brokers are now required to report your cost (basis) to the IRS, more often than not, the information provided by the broker is in error. It is best to develop a digital or paper filing system to confirm the accuracy of what your broker is tracking.
2.	Cost Basis: Know what each share of your mutual fund costs you. This basis includes any costs related to the transaction like brokerage fees. This can get pretty complicated as your mutual fund buys and sells shares in underlying individual equities that make up the mutual fund. It is even more complex if your investment in a mutual fund automatically re-invests any dividends.
3.	Transfer Trap: Ask you broker or agent if there will be a capital gain if you transfer mutual fund shares from one account to another. What appears to be a transfer may actually be a sale of shares in one fund and a purchase of shares in another. This can create a taxable event if not handled properly.
4.	Long-term Gains: Whenever possible, time your sales to avoid short-term capital gains (held less than one year). Short-term gains are taxed as ordinary income, where-as long-term gains have a lower taxable rate.
5.	Selling: If you've owned appreciated mutual fund shares for more than 12 months and want to sell, find out when your fund distributes dividends. Dividend tax rates could apply and may be very high beginning in 2013. Selling before the dividend payout may keep all your earnings as long-term capital gains.
6.	Buying: Similarly, if you've had your eye on a particular fund, understand the historic payout of dividends. The cost of the mutual fund might be artificially higher right before a dividend payout. And to make matters worse you might even get a dividend distribution that is taxed at higher ordinary income rates on gains that actually occurred before you purchased the mutual fund.
7.	Avoid taxes: Keep tax deferred investments within retirement plans growing and avoid withdrawals as long as possible.
8.	Deferred Plans: Maximize your contributions to tax deferred plans, especially those with matching contributions from your employer.
9.	Charitable Gifts: As with individual stocks, consider donating appreciated mutual fund shares instead of cash. Tax law allows you to deduct the full market value of the higher share price without having to claim a taxable gain on the appreciation of the share value.
10.	Look at Mutual Fund Costs: New open disclosure rules mean mutual fund managers must more adequately display the costs associated with each mutual fund. All things being equal, consider these operating costs when deciding between similar performing mutual funds in a category.

Help for Small Business

IRS Can Help When Starting a Small Business

If you are opening a new business this summer, the IRS has some basic federal tax information to help you get started.
Here are some things to consider when starting a business:

• Type of Business One of the first decisions you need to make is what type of business you are going to establish. The most common types of businesses are sole proprietorship, partnership, corporation, S corporation, and Limited Liability Company. The type of business you establish determines which tax forms you will need to file.
• Types of Taxes The type of business you operate also determines what types of taxes you will pay and how you will pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
• Employer Identification Number A business typically needs to get an Employer Identification Number to use as an identifier for tax purposes. Check IRS.gov to find out whether you will need this number, and, if so, you can apply for an EIN online.
• Recordkeeping Good records will help you keep track of deductible expenses, prepare your tax returns and support items that you report on your tax returns. Good records will also help you monitor the progress of your business and prepare your financial statements. You may choose any recordkeeping system that clearly shows your income and expenses.
• Tax Year  Every business taxpayer must figure taxable income on an annual basis called a tax year. Your tax year can be either a calendar year or a fiscal year.
• Accounting Method  Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

Visit the IRS.gov website and click on the ‘Businesses’ tab for more information and resources, including a special section on starting a business. Publication 583, Starting a Business and Keeping Records, can also help new business owners understand their federal tax responsibilities. The publication is also available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Starting a Business
• Publication 583, Starting a Business and Keeping Records (PDF)
• Business Taxes
• Employer ID Numbers (EINs)
• Publication 334, Tax Guide for Small Business (PDF)
• Publication 535, Business Expenses (PDF)
• Publication 538, Accounting Periods and Methods (PDF)

YouTube Video:
Employer Identification Number - English