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Capital gains rates Profits earned on the sale of stock or mutual fund shares are taxed as capital gains. But not all capital gains are treated equally for tax purposes. Gains earned on securities held more than one year before sale (“long-term”) are generally taxed at 15%. On the other hand, if you sell your securities before you’ve met the long-term holding period, your gain could be taxed at ordinary rates as high as 35%. Late-year mutual fund purchases Each year, mutual funds distribute capital gains earned on fund investment transactions to their shareholders, typically during the last quarter of the year. Before distribution, gains are accounted for in the fund’s share price. So buying shares just before a fund goes ex-dividend in essence means you’ll pay the fund for the distribution you are about to receive — and then have to turn around and report the “gain” on your tax return. You could avoid the extra income by waiting until after the ex-dividend date to make your purchase. Dividend rates Dividend income can qualify for the same preferential tax rates as long-term capital gains. But you must hold the underlying stock for a specified holding period (generally, for more than 60 days during the 121-day period beginning 60 days before the stock’s ex-dividend date). Certain dividend distributions from mutual funds can also qualify for the low rates. Accrued interest When you buy a bond between interest payment dates, the portion of the unpaid interest that accrued while the seller owned the bond is added to the purchase price. That amount is taxable to the seller, not to you. Municipal bond interest Usually, this interest is exempt from federal income taxes. But not always. While not includable in your regular income, interest earned on certain “private activity” municipal bonds has to be included in your income when figuring your potential liability for alternative minimum tax (AMT). |
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