Big Gains and Minimal Taxes

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There’s been a lot of good news in the market lately --- so much so that you may be waiting for the catch. But this year, at least, the IRS won't be waiting at the doors of shareholders in top-performing mutual funds.

These have been heady months for many investors, and not just those in dynamic, fast-growing small companies. Even big companies like Dow Chemical (NYSE: DOW) have posted impressive returns recently. So you can just imagine the kind of pleasing performance that many mutual funds will likely deliver for 2009. Check out these results, for example:

Fund	2008 Return	2009 YTD Return	Holdings Include ...
Dodge & Cox Stock (DODGX)	(43%)	26%	General Electric (NYSE: GE), Schlumberger (NYSE: SLB)
Vanguard Windsor II (VWNFX)	(37%)	21%	IBM (NYSE: IBM), JP Morgan Chase (NYSE: JPM)
American Funds Growth Fund of America (AGTHX)	(39%)	27%	Microsoft (Nasdaq: MSFT), Google (Nasdaq: GOOG)

Source: Morningstar.

But wait, there's more! When funds generate the sort of big losses they did in 2008, they tend to rack up capital losses that are carried forward from one tax year to the next. Whereas a 20% return would normally mean a sizable tax hit for shareholders, this year many funds will distribute little if anything for capital gains, because of tax losses from 2008.

The stock situation
It might be the same for you and your stock portfolio, too -- provided you sold your holdings at a loss just because they (or the market) plunged. Doing so excludes you from subsequent recoveries.

If you sold, though, and had major losses, you can only offset corresponding gains with them, in addition to just $3,000 of non-capital-gain income. That might leave you carrying forward thousands in losses. If so, you can take some gains this year, and offset them with last year's losses. Just be sure not to buy back whatever you sell until a month and a day later, so that you don't end up with a "wash sale."

So enjoy this year's hiatus from big fund taxes. And remember to be proactive with your stocks and taxes -- have a strategy.