Taxable

Come December, you may care deeply about how your mutual fund profits are taxed. By that time, however, recently introduced legislation that would give fund investors a sensible bit of tax relief will be dead. Again. A few folks on Capitol Hill have been fighting a futile battle for years now, trying to change the way funds are taxed, and lowering the burden for buy-and-hold shareholders. With the market making more gyrations than a belly dancer on speed, there's a good chance that fund managers will make a lot of moves to protect their profits this year, recognizing the gains they have picked up during a long bull market and resulting in big tax bills at the end of the year.

With next year's $1.5 billion budget shortfall drawing ever closer on the horizon, Gov. Martin O'Malley has recently been launching some tax-related trial balloons of note. The latest two are certainly worthy of consideration - adding greater progressivity to the state's personal income tax and collecting more money from some of the state's largest tax-avoiding corporations. As far as solving the deficit goes, however, they are destined to run out of gas. Let's start with income taxes.

As last-minute filers approach Tuesday's deadline to file their tax returns, some are going to be in for a rude shock: They're going to fall into the territory of the alternative minimum tax. The AMT was designed to ensure that high-income people paid at least some taxes, but it was not indexed to inflation, so it has ensnared an increasing number of Americans with higher tax bills. Changes by Congress have kept a lid on that growth, but the measures are temporary: An estimated 3.5 million taxpayers are due to pay the AMT for 2006, but without changes in the law, that will explode to more than 23 million this year and more than 32 million by 2010, say experts at the Tax Policy Center.

Editor's note: Every Tuesday through the end of tax season, The Sun will run an edited transcript of Baltimoresun.com's weekly tax-advice column featuring three experts from the Hunt Valley accounting firm SC&H Group. On a direct rollover from a company retirement plan to a 401 (k) at a bank, is the gross distribution amount on the form 1099-R added to the total earnings, even though no federal tax is withheld? -- Ted, Fallston Direct rollovers between retirement plan accounts are generally not taxable.

Editor's note: Every Tuesday through the end of tax season, The Sun will run an edited transcript of Baltimoresun.com's weekly tax-advice column featuring three experts from the Hunt Valley accounting firm SC&H Group. Is a settlement from an insurance company because of an accident taxable? - Bob, Lutherville It depends on the circumstances. If the settlement simply reimburses your expenses in repairing the vehicle, the proceeds would not be taxable. However, if the proceeds received are greater than the costs incurred, the excess would generally be taxable.

Editor's note: Every Tuesday through the end of tax season, The Sun will run an edited transcript of Baltimoresun.com's weekly tax-advice column featuring three experts from the Hunt Valley accounting firm SC&H Group. My mother died in March 2006, and I was her personal representative. I filed her 2005 individual tax forms in April 2006 and marked them deceased taxpayer. Her estate was closed in the same year, and a Form 1041 was filed. I have recently received 1099 forms for pension payments, interest and dividends for 2006.

On May 21, 2003, Wal-Mart transferred ownership of its Ellicott City store to a Delaware-registered affiliate. No money changed hands, legal records show. Why would the giant retailer go to the trouble of pushing paper in the Howard County courthouse simply to move property from one company to another under the same corporate umbrella? Pull up a chair and hear the latest tale of tax loopholes, reduced state revenue and really smart lawyers. As it wrestles with approaching deficits, Maryland may be losing millions in taxes because Wal-Mart and probably other companies have stashed deeds to local real estate in out-of-state affiliates.

When assessed values are rising rapidly, it pays to know this quirk if you're trying to buy a home: Get the deed in hand before July 1 - your tax bill will be lower. That's especially true if you're buying in an area due to be reassessed the following year. Why? Follow closely: The Homestead Property Tax Credit caps increases in taxable assessments for people who live in the homes they own. You don't qualify the first full fiscal year you own it, meaning July 1 through June 30. But afterward your annual increases can't rise beyond the limit set by your jurisdiction - 2 percent to 10 percent in the Baltimore region.

Investors with mutual funds in taxable accounts might be in for a year-end tax surprise. Each year, funds must distribute dividend income or capital gains earned on the sale of securities to shareholders so that they can be taxed on it. This hasn't been much of an issue in recent years. Funds have had losses from the bear market to offset subsequent capital gains, minimizing the tax bite for shareholders. "We have been on a tax holiday of sorts," said Tom Roseen, a senior research analyst at Lipper Inc. But the holiday is ending, Roseen said.

The people who visit this space are nothing if not inquisitive about mutual funds. Here is what those inquiring minds want to know after reading some of my recent work: I just finished my taxes for 2005, and I owed money because one fund had a big distribution. I don't get it. Wasatch Small-Cap Growth was up about 5 percent for the year, but it looks like it paid out about 10 percent of my total holdings (which I rolled back into the fund). Could that be right? - Ellen in Durango, Colo.