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Old 05-18-2011, 02:17 PM
 
301 posts, read 689,913 times
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I'm new to investing so forgive me for this simple question....I'm just trying to get a better understanding of my investments and taxes. Can someone answer this scenario?

Year 1: I put 1k into standard taxable mutual fund account
Year 2: My account is now worth $400 b/c of market loss
Year 3: My account is now worth $700 b/c of market gain

Do I have to pay taxes on that $300 gain in Year 3 even though it's less than my original contribution in Year 1 (cost basis)? Likewise, do I get any tax breaks or benefits when my account decreases in value from one year to the next (e.g., from Year 1 to Year 2)?

Also, at what rate am I taxed with any unrealized gains/dividends in a given year? Is it my income tax rate?

Thanks!
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Old 05-18-2011, 02:22 PM
 
Location: Over There
402 posts, read 1,404,736 times
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Quote:
Originally Posted by yolli71 View Post
I'm new to investing so forgive me for this simple question....I'm just trying to get a better understanding of my investments and taxes. Can someone answer this scenario?

Year 1: I put 1k into standard taxable mutual fund account
Year 2: My account is now worth $400 b/c of market loss
Year 3: My account is now worth $700 b/c of market gain

Do I have to pay taxes on that $300 gain in Year 3 even though it's less than my original contribution in Year 1 (cost basis)? Likewise, do I get any tax breaks or benefits when my account decreases in value from one year to the next (e.g., from Year 1 to Year 2)?

Also, at what rate am I taxed with any unrealized gains/dividends in a given year? Is it my income tax rate?

Thanks!
I would check with your accountant. If you took a tax deduction for a $600 loss in year 2, then you would pay tax on a $300 gain in year 3. If you did not take a deduction for the initial $600 loss, then you are still at a $300 loss.
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Old 05-18-2011, 04:26 PM
 
106,242 posts, read 108,237,907 times
Reputation: 79781
Quote:
Originally Posted by yolli71 View Post
I'm new to investing so forgive me for this simple question....I'm just trying to get a better understanding of my investments and taxes. Can someone answer this scenario?

Year 1: I put 1k into standard taxable mutual fund account
Year 2: My account is now worth $400 b/c of market loss
Year 3: My account is now worth $700 b/c of market gain

Do I have to pay taxes on that $300 gain in Year 3 even though it's less than my original contribution in Year 1 (cost basis)? Likewise, do I get any tax breaks or benefits when my account decreases in value from one year to the next (e.g., from Year 1 to Year 2)?

Also, at what rate am I taxed with any unrealized gains/dividends in a given year? Is it my income tax rate?

Thanks!
your confused.... . if you didnt sell you only get taxed when the fund pays you dividends or capital gains . funds have to pay out a certain amount of their gains every year and those are taxable to you if you get one.

if you sold you get a realized gain or a loss. thats when you get taxed and can take a loss or pay taxes on the gains. how much you pay is based on how long you held the fund.

under a year and its at your regular income rate. over a year and its a max of 15%.

just the up and down of your fund without the above taking place is not taxed.
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Old 05-19-2011, 05:52 AM
 
301 posts, read 689,913 times
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Thanks mathjak. I completely understand what you're saying in the 2nd half of your explanation with regards to realized gains/losses, but I'm still a little confused over the dividends and unrealized gains/losses.

When you say I get taxed on dividends, does this occur even if my current balance is less than my original contribution?

Staying with the example I used above (and assuming I never sold anything), if I put 1k into a fund that pays dividends (e.g., T. Rowe Price Value Fund)...and by year 2 I have a loss...but in year 3 it rebounds with a slight gain...do I pay taxes on those dividends in year 3 (even though I'm still down compared to my original 1k contribution)? Does that make sense?

And let's say in year 4, my account goes up to $900 (increase of $200 from year 3 but still $100 less than my original 1k contribution), do I pay taxes on that increase?

Or am I just completely getting this wrong and confusing dividends with the value of my fund?
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Old 05-19-2011, 06:55 AM
 
Location: Chapel Hill, NC, formerly NoVA and Phila
9,767 posts, read 15,739,138 times
Reputation: 10865
You always pay taxes if they issue dividends regardless of whether your account balance has gone up or down. It does not matter what the value of your account is; if they issue dividends, you pay taxes.

The value of your account only comes to play when you sell. If the value of your account has gone down, you can take a capital loss and lower your taxes. If the value of your account has gone up when you sell, then you must take a capital gain and pay taxes.

Quote:
Originally Posted by yolli71 View Post
Thanks mathjak. I completely understand what you're saying in the 2nd half of your explanation with regards to realized gains/losses, but I'm still a little confused over the dividends and unrealized gains/losses.

When you say I get taxed on dividends, does this occur even if my current balance is less than my original contribution?

Staying with the example I used above (and assuming I never sold anything), if I put 1k into a fund that pays dividends (e.g., T. Rowe Price Value Fund)...and by year 2 I have a loss...but in year 3 it rebounds with a slight gain...do I pay taxes on those dividends in year 3 (even though I'm still down compared to my original 1k contribution)? Does that make sense?

And let's say in year 4, my account goes up to $900 (increase of $200 from year 3 but still $100 less than my original 1k contribution), do I pay taxes on that increase?

Or am I just completely getting this wrong and confusing dividends with the value of my fund?

Last edited by michgc; 05-19-2011 at 07:25 AM..
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Old 05-19-2011, 07:14 AM
 
301 posts, read 689,913 times
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Michgc - thank you for the explanation...I got it now. One more question: is it possible to get dividends even if the market is tanking? I could be mistaken, but I seem to recall getting tax statements from T. Rowe Price showing dividends even during 2008 and 2009.
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Old 05-19-2011, 07:25 AM
 
Location: Chapel Hill, NC, formerly NoVA and Phila
9,767 posts, read 15,739,138 times
Reputation: 10865
Absolutely. If they sell a security within the fund and make a profit, it passes that profit along to you in the form of a dividend even if the overall value of the fund has gone down.

Quote:
Originally Posted by yolli71 View Post
Michgc - thank you for the explanation...I got it now. One more question: is it possible to get dividends even if the market is tanking? I could be mistaken, but I seem to recall getting tax statements from T. Rowe Price showing dividends even during 2008 and 2009.
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Old 05-19-2011, 07:36 AM
 
301 posts, read 689,913 times
Reputation: 164
Makes sense...thanks!
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Old 05-19-2011, 09:12 AM
 
Location: Central Texas
13,715 posts, read 31,093,243 times
Reputation: 9270
Quote:
Originally Posted by yolli71 View Post
Michgc - thank you for the explanation...I got it now. One more question: is it possible to get dividends even if the market is tanking? I could be mistaken, but I seem to recall getting tax statements from T. Rowe Price showing dividends even during 2008 and 2009.
Remember, most mutual funds hold hundreds of different stocks (or bonds). If any one of those investments pays a dividend, the mutual fund must pay it to you proportionally. 99% of the holdings could have lost value, but 1% could generate a dividend, and you will pay taxes on it.
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Old 05-20-2011, 03:30 AM
 
106,242 posts, read 108,237,907 times
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thats why when you buy a stock or a fund you may want to wait until after a distribution. you will end up buying a tax liability and be not 1 penny richer for it.

it only adds to your cost basis and you will make it back if and when you ever sell but you will pay the tax now.. mutual funds usually post a list of up coming payout dates.

can you imagine those poor soles who bought the fidelity magellan fund right before the new manager harry lange cleaned house and sold the current funds holdings bought by the old manager robert stansky .

the fund fell 18% after a 22.00 a share capital gains distribution and shareholders not in a retirement plan had a huge distribution to pay taxes on. many had to sell their shares if they were reinvesting the dividends to pay the taxes due.

if you were a recent shareholder you didnt see a penny in any real gains from that,just a tax bill.

Last edited by mathjak107; 05-20-2011 at 03:58 AM..
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