If you receive statements directly from the mutual fund company, save your December statement each year as these statements show the total reinvested dividends for the year and all other transactions. If you receive statements from the brokerage firm on your mutual funds and the statements do not accumulate the total of your reinvested dividends each year, then you will need to save every monthly statement.
If you don’t have these statements, then you don’t have the information you need to calculate the taxes when you sell. And for many investors, the lack of statements often leads to overpaying your tax. Here’s why.
Hypothetically, say you invested $50,000 into a fund that has grown to $150,000. On the face of it, you gained $100,000. Many people would assume that they pay tax on the $100,000 gain. But if you have reinvested say a total of $40,000 of dividends through the years, then your actual investment is the original $50,000 plus the $40,000 of dividends, a total of $90,000. Now, you can see that your gain is really $60,000 ($150,000 value today less your investment of $90,000).
If you don’t have the statements, either the fund company may have the data or your brokerage firm may have it. Now that you have the information, the calculations can get more complicated.
If you inherited the shares, your original investment is the value on the date of the benefactor’s death. If you sold some of your shares previously, you need to know which shares were sold. When you sell shares, you get to select which shares are sold. This is only a paper exercise where you report to IRS that you sell specific shares bought on specific dates. This flexibility of selecting shares can save a lot of money because you can pick the shares with the highest cost (and thus the lowest gain and smallest tax).
So, if you are planning to sell in the next 12 months or have sold this year, we can show you how to make the most of a sale for tax purposes. Just bring in your mutual fund statements and we can show you how to simplify what you need and pay the least to IRS.