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Be Careful:

There are a number of people out there who are always ready to separate you from your money any way they can. 

Here's a case in point.  Many people have been getting calls from someone who claims to represent their bank.  He says that the bank is having difficulty in being Year 2000 compliant.  He then informs you that you should transfer your money to a special bond account to protect your funds until the bank is fully Y2K compliant.  He then asks for your account number and verbal authorization to transfer the funds.  Don't give it to him!

One good way to handle a call like this is to ask the caller for his phone number and tell him you will call back after you had chance to verify the authenticity of his call with your bank.  Chances are he will just hang up at that point.  If he gives you any information at all that might be useful, pass it on to the fraud division of your local law enforcement agency.

Tax Issues

This is to alert you to some tax surprises that your mutual fund investments may cause.

First of all, you may not be aware of at least a couple of unexpected ways in which you may make taxable "sales" of part of your interest in a mutual fund. You may already have made taxable "sales" of part of your mutual fund investment without knowing it.

One way this could happen is if your mutual fund allows you to write checks against your investment in the fund. IRS says that every time you write a check against your mutual fund account, you have made a partial sale of your interest in the fund. Except for money market funds where the share value is constant, you may therefore have taxable gain (or a deductible loss) whenever you write a check.

Here's another way you can get hit unexpectedly with taxable sale treatment. Say that your mutual fund organization allows you to make changes in the way your money is invested—for instance, lets you switch part of your investment from a stock fund to a bond fund. Making such a switch is treated as a taxable sale of your shares in the stock fund.

Recordkeeping is important. Be very careful about saving all the statements that the fund sends you—not only official tax statements, such as Forms 1099-DIV (or the fund's version of the 1099-DIV), but the confirmations that the fund sends you when you buy or sell shares, or when your dividends are reinvested in new shares in the fund. Unless you keep these records, you won't be able to prove how much you paid for the shares, and thus the amount of gain you have to pay taxes on (or the amount of the loss you can deduct) when you sell them. You will also need to keep these records to prove how long you've held your shares, e.g., more than 18 months if you want to take advantage of the 20% rate ceiling on such gains. (If you get a year-end statement that lists all your transactions for the year, then you can just keep that and discard quarterly or other interim statements or confirmations. But save anything that specifically says it contains tax information.)

Time your purchases and sales. If you're planning to invest in a mutual fund, there are some important tax consequences that you should take into account in timing the investment. For instance, an investment shortly before the payment of a dividend is something you should generally try to avoid, since you may, in effect, be buying a tax liability. If you're planning to sell (redeem) any of your mutual fund shares, timing is also important. A properly timed sale can save you tax dollars.

Identify the shares you sell. If you're planning to sell some but not all of your shares, there are complicated rules you should first consider about how to identify the shares you're going to sell. The proper application of these rules can reduce the amount of gain you will have to pay taxes on, or qualify the gain for favorable long-term capital gain treatment.

If you would like to find out more about tax planning for buying and selling mutual fund shares, please give us a call, or send us an e-mail.

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Last modified: June 19, 2000