Investors in taxable mutual funds might see their tax bill rise next year, according to the Chicago Tribune. The chance is waning for fund managers to offset capital gains from selling winners in a portfolio with losses from having sold losers during the market tumble earlier in the decade. “The last four years, we have been on a tax holiday of sorts, and the party is over,” said Tom Roseen, senior research analyst at Lipper. The turnover of portfolios has increased as active managers buy and sell in order to beat market benchmarks. Also, higher interest rates and increased dividend payments by many companies increased the amount of capital gains and income distributions paid by mutual funds to their investors. Taxable-mutual fund investors, who hold funds outside the tax-deferred savings accounts, such as IRAs and 401(k)s, saw a 56% increase in taxes from 2005 to 2006, to $23.8 billion, according to a Lipper report. Many mutual fund investors reinvest income and capital gains. However, they still have to pay the tax, even though they have a buy-and-hold investment strategy, Roseen said. So-called tax loss carry-forwards from the years of the market slide are being used up or expiring, he noted. “The idea of the tax holiday is interesting,” said Roy Weitz, a mutual fund critic who operates the FundAlarm website. “That is not the way investors think.” Tax losses have a “tremendous impact” because they can offset capital gains when a fund sells securities at a profit, Weitz said. “Once those are gone, you have gains without any offsetting losses,” he said. The level of taxes, as a percentage of an investment, might now be significantly greater than the level of expenses charged by the manager, the study found. On a positive note, the cut in capital gains and dividend income tax rates has been a boon to taxable-mutual fund investors,” said Roseen. Equity income funds may grow in popularity, which pay tax advantaged dividend income instead of fully taxable interests income, predicts Roseen. “People are in a pay me now attitude,” he said. “They want to see that current income.” However, mutual fund analysts and Roseen warn against buying a fund because it advertises tax efficiency. “Tax-managed funds have gotten very little attention” said Weitz. “I tend to think of them as fringe investments.” The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.
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