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Tax Time: More Than Just Filing Forms
Tax season is back again. In just a few weeks, many of you will be filing your federal and state tax returns. While gathering your paperwork and checking boxes can feel like a routine process, this is also a great time to really look at what’s on your tax return—and understand what you might be able to control moving forward.
There are a few key areas that can have a bigger impact on your tax bill than you might realize. Let’s focus today on two of the biggest: capital gains and dividends.
The Problem with Capital Gain Distributions
Coming off a boom year in the markets in 2024, many investors are seeing capital gain distributions on their IRS forms. Here’s the tricky part: if you own mutual funds, you have almost no control over when those gains are realized.
If the mutual fund manager sells part of the portfolio for a gain, you—the investor—are responsible for paying capital gains tax on that distribution, even if you didn’t sell anything yourself.
But here’s the good news:
You don’t have to be stuck with these surprise tax bills.
How ETFs and Index Funds Can Help
One of the major alternatives to traditional mutual funds is using ETFs (exchange-traded funds) or index funds.
The benefit?
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ETFs and index funds generally don’t distribute capital gains because they aren’t actively managed.
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You only recognize a gain when you, or your advisor, decide to sell a holding.
This gives you much more control over when and how taxes are triggered. You’re not stuck paying for decisions made by a fund manager. We believe this control is a big deal when it comes to smart tax planning.
Dividends: Ordinary vs. Qualified
The second item worth reviewing is dividends. Not all dividends are treated equally on your tax return.
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Ordinary dividends (from taxable bonds, certain mutual funds, and stocks) are taxed at your regular income tax rates.
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Qualified dividends, however, are taxed at lower capital gains rates—and for some investors, even taxed at zero percent, depending on income.
Understanding how your investments generate dividends—and how they flow through your return—can either help you or cost you more in taxes.
Take Control of Your Tax Strategy
In short, it’s not just about getting your return filed—it’s about learning from it. By paying attention to how capital gains and dividends affect your bottom line, you can make better choices for the future and potentially minimize the taxes you owe.
Stay tuned—we’ll be sharing even more ideas for improving your tax efficiency as we move through the year.
