It's time for year-end tax planning

MUTUAL FUNDS

December 08, 1991|By WERNER RENBERG | WERNER RENBERG,1991, Werner Renberg

Amid all the activities that fill your December calendar, you may not want to take the time to think about your investments. If you own shares of well-managed mutual funds that are helping you to achieve your investment objectives, you shouldn't have to think about them.

Nevertheless, you may find it worthwhile to consider whether there is anything you should do -- or avoid doing -- before New Year's Day with respect to your fund portfolio so that you can hold down your income tax bill for 1991.

Year-end tax planning -- including whether to take or defer capital gains or losses -- is always a good idea.

This year, gains in the stock and bond markets, which produced appreciation in fund shares and some large capital gains distributions, could make it especially important.

Specific advice about your situation will require a chat with the tax authorities or a tax adviser, but some pointers may be helpful, whether you're in taxable or tax-exempt funds.

Taxable funds

If you're invested in money market, bond or equity funds, you probably will be reporting income dividends (including short-term capital gains) and long-term capital gains distributions based on the Internal Revenue Service forms (1099-DIV) your fund companies or broker will mail in January.

It won't matter to the tax collectors whether you took the cash or reinvested it in additional shares.

If you sold bond or equity fund shares during the year -- via outright sales, exchanges or checks drawn on the fund accounts -- you also will have to report any short- or long-term capital gains.

If you sold shares for less than they cost you, you will be able to apply your losses up to $3,000 ($1,500 if you're married and filing separate returns) against any other 1991 capital gains or income.

To determine which, if any, year-end actions you may wish to take, you first need to get an idea of what your dividends, capital gains distributions and capital gains or losses add up to.

If you don't already know the net of capital gains or losses resulting from your sales of fund shares and other assets, you have to calculate the cost basis of the shares you sold. Be sure to include the total cost of shares bought with reinvested dividends on which you already have paid taxes.

Otherwise, your cost basis would be too low and your taxable capital gains -- and tax owed -- too high.

It is quite possible that you may not know the totals of your funds' income dividends and capital gains distributions for the year.

In fact, some funds have not yet made their year-end declarations.

Therefore, learn what you can by calling your funds' toll-free numbers.

Ask whether the year-end distributions have been declared. If so, find out what they were and add them to the year-to-date totals on your latest statements.

If not, find out when they will be declared and, if possible, get estimates of what they are likely to be.

If you determine that the net of your capital gains and capital gains distributions will be positive, figure out whether you have any unrealized losses among your investments.

If so, think about whether it might make sense to sell some shares and apply the losses against your net capital gains to reduce your tax liabilities. (Don't reinvest in the same funds within 30 days. Doing so would violate the rule against "wash sales," and the losses would be disallowed. Buy comparable securities instead.)

If the net of your share sales and capital gains distributions is negative but you have unrealized capital gains, think about whether it would be smart to sell enough shares to produce gains offsetting the loss. Then reinvest as you please.

Whatever you do, if you want to buy shares of an equity fund that has not declared year-end income and capital gains distributions, wait.

Buying before the date on which shareholders of record are credited with them would expose you to taxes even if you've only owned the shares a day. Put it off until after the record date.

Tax-exempt funds

If you own shares in a tax-exempt bond fund, there is a good chance your fund will have made, or will make, at least a modest taxable distribution of capital gains that it realized this year.

Such distributions may have been expected, but they will come as a surprise to many. Surprised or not, you may need to take them into consideration in your year-end planning.

The same goes for any taxable capital gains or capital losses you may have realized in selling shares of your fund.

ZTC Tax-sheltered accounts

You have until April 15 to put money into an individual retirement account in a money-market, bond or equity fund.

If you are self-employed and want to open a simplified employee pension plan IRA, you can wait until then, too.

But if you prefer a Keogh retirement plan, you must establish it by Dec. 31.

If you are retired and want to take money out of an IRA, bear in mind that a withdrawal is taxable except for your non-deductible contributions.

If you can wait until January, the withdrawal won't be taxed until 1992.

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