<p>I will admit to my financial ignorance and it is embarrassing and I should get my financial advice from CC instead of my hairdresser, but he’s got me worried. I have about $5000 in a mutual fund. If I cash it out to pay tuition, do I also have to pay tax on it? He says I’ll get socked a bundle. I thought because I had to pay taxes on it all along I won’t have to if I ever needed to use it. I know it would be a horrible terrible stupid thing to cash out a retirement fund but is a mutual fund that isn’t and IRA or whatever a problem too?</p>
<p>Are you making a profit on your mutual fund ? </p>
<p>Whether you need to pay taxes depends on how much you paid for it and the amount of tax depends on how long you had it and what is your income level.</p>
<p>This will probably be reported as a capital gain and depending on the amount you would use some version of schedule D. The gain (or loss) is the difference between what you paid for it initially and what it was worth when you sold it. If you made several purchases at different times you will need to report the number of shares and the cost of those shares on each date of purchase. This would also apply if you have been reinvesting any dividend distributions (each dividend reinvestment would represent another purchase). If you have been receiving any dividend checks they would be income for each tax year. Note that you may be able to carry over losses into future tax years if you can’t fully deduct them. Subtract any commissions and management fees. You can also deduct any US state, local, or US government bond income which may be a part of your mutual fund income (but on the state return(s) you may have to report an adjustment for non-resident filing). You will get a 1099 from the mutual fund at the end of the year and possibly other paperwork which will tell you if any of the fund’s income is tax deductible to you. Read over the instructions for schedule D and Publication 564 and 550.</p>
<p>OP - Like a lot of things that involve the government, “it depends.” Not an IRA, not a 401K, not a 403b, a Keogh, not a mutual fund inside a retirement plan, etc. then you PROBABLY have only capital gains to worry about. And if you have carry-over capital gains losses from the tech crash (or this year’s credit crisis crash), or if you have a very good tax attorney then you may not have any tax to pay at all — provided the mutual fund is not encumbered by a contract or court directive. Sigh.</p>
<p>If your mutual fund is like mine, you may have been paying taxes along the way on the dividends/income that your fund has distributed to you (and you have been re-investing). </p>
<p>If so, then your basis will be what you originally spent plus the amount of taxes you’ve paid on those distributions.</p>
<p>And you’ll pay capital gains tax on the difference between your net proceeds on the sale minus your basis as calculated above.</p>
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<p>That’s not exactly right. Your basis will be what you originally spent on the shares plus the cost of the reinvested dividends. When you reinvest dividends and capital gain distributions to buy more shares, you should add the cost of those shares (that is, the amount invested) to the cost basis of the shares in that account because you have already paid tax on those shares.</p>
<p>There’s a good explanation here: [Financial</a> Guide: MUTUAL FUND TAXATION: How To Cut The Tax Bite](<a href=“Financial Guide: MUTUAL FUND TAXATION: How To Cut The Tax Bite”>Financial Guide: MUTUAL FUND TAXATION: How To Cut The Tax Bite)</p>
<p>don’t worry, you probably don’t have a taxable profit in any mutual fund any more ;)</p>
<p>thanks, patsmom. I meant that the amount of the distribution is added to the original basis.</p>
<p>I really liked the guides found here:</p>
<p>[Fairmark</a> Press Tax Guide for Investors](<a href=“http://www.fairmark.com/index.htm]Fairmark”>http://www.fairmark.com/index.htm)</p>
<p>The book Consider Your Options helped me avoid the stress when I was dealing with ISOs and AMTs.</p>