Fall is in the air, football is back, and the weather in South Louisiana is finally getting cooler. This is also a good time to assess your client's income taxes from their taxable investments. You'll have until the close of trading Dec. 31 to take action. However, if you're going to attempt to reduce your client's tax liability, you should act well before then, since most funds make their annual capital gains distributions in December and some as early as October.
Tax Liability: The Source
In general, clients with a nonqualified or taxable account may be subject to income taxes. If they invest in a mutual fund or ETF, their tax liability will result from dividends, interest and capital gains distributions, or from selling an investment at a gain during the year. As an advisor, you may be able to reduce the amount your client has to pay and increase your value proposition in the process.
Fund Distributions
Many funds make distributions throughout the year. For example, funds with fixed income securities typically make a distribution each month (i.e. interest). Funds that invest in stocks normally make a quarterly distribution (i.e. dividends). As mentioned, most funds make their capital gains distribution in December, although a few distribute in October. It's important to note that stock ETFs rarely make a capital gains distribution due to their structure. This fact alone makes a compelling argument for incorporating ETFs into a portfolio. To learn more about the difference in the tax treatment of mutual funds versus ETFs, read: Under the Hood: Tax Treatment of ETFs vs. Mutual Funds.
