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Taxes 2014: The Massive Tax Trap You Must Avoid

By Dan Caplinger – Updated Feb 15, 2017 at 6:40AM

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To save on your taxes, you have to avoid making mistakes. Find out one of the most common problems investors face and how you can keep it from costing you at tax time.

Nobody wants to pay any more in tax than they have to. But toward the end of the year, a big tax trap looms for unsuspecting investors, and if you don't use one simple strategy to avoid it, it can cost you a huge amount in additional tax.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, discusses the tax trap that mutual fund distributions bring to taxpayers at year-end. Dan notes that because funds are required to distribute their income and capital gains, they can catch unsuspecting fund shareholders by surprise. Especially after long bull markets, funds are more likely to make big taxable distributions.

Dan discusses a recent Morningstar finding that T. Rowe Price (TROW -0.56%), Janus Capital (JNS), and BlackRock (BLK 1.08%) could have several funds with large distributions, because of recent changes in fund management or strategy that required big changes to their portfolios. He concludes with the easy solution that fund investors can use to avoid getting in tax trouble with such funds.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends BlackRock. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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