A bill introduced in the House of Representatives would exempt from federal taxes up to $3,000 in mutual fund capital gains fund investors must accept even though they have not sold their fund shares. For investors filing joint returns, that exemption would be doubled to $6,000.

The bill, introduced by Representative Jim Saxton (R.-N.J.), vice chairman of the Joint Economic Committee, provides for annual cost-of-living adjustments to be made to the exempted capital gains beginning in 2002.

"The current tax system undermines personal saving and investment in many ways, and one of these is the treatment of mutual fund capital gains distributions," said Rep. Saxton in a statement. While the bill would help alleviate the tax burden of all fund investors, the bill is aimed at encouraging low- to middle-income taxpayers to save more.

The proposed legislation was prompted by a study released by the Joint Economic Committee June 12. The study suggested that capital gains that are taxable should only be triggered by a mutual fund investor's selling of his shares, not a mutual fund's selling of its securities. The current taxing of funds' reinvested capital gains causes the average mutual fund investor to suffer 10 percent to 20 percent a year in lost returns, the study concluded.

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