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What’s Up with the Capital Gains Distributions on My Tax Bill?

What’s Up with the Capital Gains Distributions on My Tax Bill?

March 10, 2024

Tis the season. Most of us have started preparing our taxes. Many of my clients have all their investment account form 1099s by now. Have you ever noticed that sometimes you find capital gains you didn’t expect on your 1099. This income is reported to the IRS and can make a big difference in your tax bill.

Why Do You Have Capital Gains Distributions?

All mutual fund companies owned in a taxable account will report interest, dividends and capital gains every year. Sometimes, the fund needs to sell large chunks of its holdings and sometimes those sales will create Capital Gains. This often happens in years when the market is down. Because many people sell out of a fund after a big loss. So, managers need to sell holdings to create cash to pay out shareholders leaving the fund. Even though the market is down, some of those holdings might have grown from their original purchase price. So, the sale is a Capital Gain. So, your fund is down AND you get a bill at the end of the year.

If you own individual stocks and bonds or Exchange Traded Funds, it’s less likely that you have surprising capital gains you didn’t expect. One reason is that None of these securities will create PASSIVE capital gains. If you own stock, bond or Exchange Trade Funds and they grow in value and then you sell them, you typically have considered the capital gain in those securities before you made the sale.

Capital Gain Distributions and Your Tax Bill

Now, let's address the critical question: Are Capital Gain Distributions Taxable? Yes, they are. When you receive capital gain distributions, you're liable for taxes on these GAINS, even if you didn't actively sell any of your investments. But the AMOUNT of tax will depend on your total income. For 2023, here are the Capital Gains tax rates:

Capital Gains Tax Rate

Single Taxpayer

Taxable Income

Married Filing Jointly Taxpayer

Taxable Income

0%

Up to $44,625

Up to $89,250

15%

$44,626 to $492,300

$89,251 to $553,850

20%

Over $492,300

Over $553,850

Part of my work for client is helping them use Tax Savvy Investing strategies wherever possible. So, we are always helping to navigate capital gains distributions in Saint Paul, Minn.

If capital gains questions have you wondering about your overall financial plan, then maybe you would benefit from a visit with an experienced, highly-trained, CERTIFIED FINANCIAL PLANNER™ professional and Behavioral Financial Advisor in West Saint Paul, Minnesota to help better understand your options. I love to meet new people. So, follow this LINK to find a time for us to have a get-acquainted visit.

Dunncreek Advisors LLC: Your Trusted Financial Partner

I am a financial planner who is an advocate for my clients ALL THE TIME – a fiduciary financial planner. I provide guidance based on clients’ best interests, not commissions or sales quotas. I think it’s the best way to serve clients and I am thrilled to work this way all the time.

And yes, I’m still taking on a few great families to be part of my financial planning practice.

Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.