Annual Drill on Capital Gain Distributions

In the words of baseball’s quotable Yogi Berra, “It’s déjà vu all over again.”  ‘Tis the season of giving, and a select few may have received gifts in years past they’d rather not have received for one reason or another.  Investors should expect that to be the case this year from mutual fund managers, as has been the case for several years now.

Mutual funds are composed of a basket of securities.  Within the fund, as those securities within the fund rise and fall in value, any sales that are made cause realized gains and losses.  Realized losses are netted against realized gains, and any net gains are passed through to shareholders.  In general, shareholders receive notice of this on their 1099-DIV’s and are required to report the realized gains on their respective tax returns.

We experienced a period of relief for a few years following the so called Great Recession, when realized losses within mutual funds were carried forward and used to offset realized gains in future years and avoid taxable distributions to shareholders.  For the last several years, however, distributions have become the norm for equity funds as the stock market has continued its welcome rise since bottoming out in March of 2009.  Capital gain distributions will again be present in 2017, and investors should be prepared.  There are some equity funds that still are estimating little or no capital gains distributions, and many are in the 3-4% of Net Asset Value range.  However, there are also a handful equity funds that are estimating capital gain distributions of 8-10%, and we have seen distribution estimates for a select few as high as 20% or more of fund value!

If these funds are owned in a retirement account, there is little cause for concern, as the distributions are sheltered from taxation.  If they are owned in a taxable investment account, investors need to be aware that taxable distributions are likely on the way.

We are engaged in year-end tax planning for our clients.  However, given the positive movement in the market over the last several years, we are seeing most of our clients in the fortunate position of not having losses they can use to offset these anticipated gains.

The silver lining to this cloud is that, while there may be capital gains taxes to pay for 2017, it is largely because assets have appreciated.  We would much rather be in the positive position of paying taxes on gains, than find ourselves not paying taxes due to losses in accounts.  When the IRS comes a-calling, try to remember the blessing that causes such curse.

Barry Nelson

A little more about Capital Financial Planners...

Established in 1984, Capital Financial Planners, LLC is an independent, fee-based investment management and financial planning firm located in Salem, Oregon. We provide wealth management and advisory services to clients in the Pacific Northwest and beyond. Our services include retirement planning, investment management, advisory services for trustees, hourly financial planning and more. We take a holistic and collaborative approach, working not only as our clients’ financial advisors, but as their financial partners.

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