Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.
Mutual funds buy
and sell stock and other securities throughout the year. Gains on these sales
increase the "net asset value," or NAV, of the fund, and your shares
in the fund increase in value.
requires that funds distribute net capital gains each year to shareholders.
During the fourth quarter the fund manager will calculate the net gains for the
year, declare a capital gain dividend, and distribute this dividend to
shareholders. This is usually done in mid to late December. The shareholder
will pay federal and state income tax on this distribution. After the
distribution is made the NAV of the fund will drop.
Basically, if your
shares are worth $10,000 on December 1st and the fund issues a $1,000 capital
gain distribution on December 15th your shares will be worth $9,000 on December
16th. If you had purchased the shares on December 1st you would be stuck with
paying tax on $1,000 without actually receiving a financial benefit from the
$1,000. You started out with $10,000 but end up with $9,800 or so ($9,000 NAV
plus $1,000 dividend received less federal and state income tax on $1,000
If you want to
purchase shares in a mutual fund during the fourth quarter of the year, wait
until after the capital gain dividend has been issued, and the NAV has dropped,
before purchasing the shares.