There were plenty of stock market losses in 2022, but investors may still receive a year-end mutual fund distribution this month. Optima Tax Relief explains how this can affect taxes and some strategies to prevent a tax bill.
Mutual funds typically have distributions, or payouts, of dividends and capital gains made to investors. The payouts usually happen at the end of each year and are considered taxable income, even if the investor reinvests the money in shares. The fund estimates are usually announced in October or November each year, giving investors some time to make ownership changes.
When the stock market does not perform well, many investors are shocked to find a surprise tax bill caused by year-end mutual fund payouts. Not only will investors owe long-term capital gains taxes on assets held for longer than a year, but their short-term investments could also be subject to income taxes. The long-term capital gains rates for 2022 are as follows:
Single Filers
- 0% if taxable income is $41,675 or less
- 15% if taxable income is between $41,676 and $459,750
- 20% if taxable income is $459,751 or more
Married Couples Filing Jointly
- 0% if taxable income is $83,350 or less
- 15% if taxable income is between $83,351 and $517,200
- 20% if taxable income is $517,201 or more
In 2021, many investors unexpectedly received year-end mutual fund distributions, and some are more prepared in 2022. Because 2022 showed a market decline, investors may be able to harvest their tax losses. In other words, they can sell underperforming investments and then use that loss to reduce taxable capital gains. The IRS typically allows taxpayers to deduct up to $3,000 in capital losses from income each year, or $1,500 for married couples filing separately. In any case, investors must act quickly before they receive their tax forms from brokers and it becomes too late.
