As the end of 2013 is imminent, many people are starting to think about their income tax situation for the coming tax season. Inevitably, that makes some people look at the unfairness in the tax system. At this time of year, one area in particular draws the ire of proponents of tax fairness.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, talks about the taxation of mutual-fund distributions and why it's unfair for millions of fund investors. As Dan notes, with stocks, you don't have to pay tax on capital gains until you actually sell shares. But funds are required to distribute their capital gains on the stocks they sell inside their portfolio, creating taxable income for their shareholders even if they reinvest those distributions to buy new shares. Dan discusses how many investors have moved away from mutual funds toward broad-based ETFs Vanguard Total Stock (NYSEMKT: VTI ) and SPDR S&P 500 (NYSEMKT: SPY ) as well as SPDR Select Financials (NYSEMKT: XLF ) and other sector-specific ETFs in order to minimize this problem. Unfortunately, lawmakers haven't made fixing this unfair tax a priority, meaning that investors will still have to deal with it for the foreseeable future.
Be smart about your taxes for 2014
Unfair or not, it's smart to know about mutual-fund distributions and their tax impact in order to avoid unnecessary surprises from Uncle Sam. In our brand-new special report "How You Can Fight Back Against Higher Taxes," The Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.