Mutual Fund Tax Laws

Mutual fund tax laws can be complicated for investors. When investing in mutual funds, you need to pay attention to mutual fund tax basis, mutual fund redemption and taxes as well as foreign tax credit of mutual funds for examples. The tax treatment of mutual funds can be overlooked causing complications in mutual fund investing. There are also other areas of mutual fund tax laws that investors often ask such as: are mutual fund expenses tax deductible, what are the mutual fund tax incentive in Kansas or any other particular states, how are mutual fund dividend taxed, what are the foreign tax credit on mutual funds, what are the tax penalties for early withdrawal of mutual fund.

Many people are also confused as to what they need to report to the IRS. For example, are the mutual fund management fees included in the tax filing to the IRS? How about tax free mutual fund money market accounts? If you don't have an accountant or CPA preparing your taxes, the chances are you will have a headache doing it by yourself.

Below are some useful mutual fund tax laws

What is the mutual fund tax basis or cost basis?

The cost basis of the mutual fund is usually the amount you invested in that mutual fund. However, if you inherit mutual fund's shares, then your cost basis is not what you paid for since you did not pay for them. Your mutual fund cost basis is now the value of the mutual fund shares on the date of the death of the person who passed the mutual fund shares to you.

Receiving mutual funds as a gift

If you did not inherit the mutual funds but rather received the shares as gifts and then you sell the mutual fund shares at a loss or a price that is less than what your gift giver paid for, then your cost basis is the value of the mutual fund shares on the day you were given them or the price the original owner paid for them whichever is lower.

Mutual fund dividend tax laws

Income from mutual funds is dividend income for tax purposes. Whether the income is from a money market mutual fund or a bond mutual fund, the income is considered dividend and not interest in the eyes of the IRS for tax purposes.

Foreign tax credit on mutual fund

If you own a mutual fund that invests in foreign stocks or securities of any kind, you can get a tax break for foreign taxes paid by the mutual fund. This is a foreign tax break to you that the IRS has allowed. These foreign taxes should be reported on the IRS 1099-DIV tax forms which your mutual funds mail to you. Alternatively, you can obtain foreign tax credit on the mutual fund that invests in foreign shares. Foreign tax credit on mutual funds of the sort usually is worth more. How do you obtain foreign tax credit on mutual fund? you need to fill out the IRS tax form 1116 called Foreign Tax Credit for Individuals.