500 Newport Center Drive, Suite 500
Newport Beach, CA 92660
Phone: (949) 721-2330
Fax: (949) 721-0734
February 2009 
 |
 |
 |
 |
 |
2007 Taxes – Good News / Bad News
By Marty McNamara, CPA
Expect to show more taxable income this year as a result of your investments in mutual funds owned outside of tax-deferred accounts. Mutual funds are required to distribute capital gains to shareholders and many funds plan to do so during the final two months of 2007. The IRS taxes these distributions to shareholders as ordinary income or at the current long-term capital gains tax rate of 15% (5% for taxpayers in the bottom two brackets).
Mutual funds are distributing more capital gains this year and for good reason - - they have been making money. In fact, most mutual funds have been quite profitable since 2003. It’s been a great five years for the stock market. Mutual funds, however, will distribute more gains in 2007 than in the previous few years because they have used up all of their loss carryforwards from the 2000 – 2002 bear market, and are now out of losses to offset gains.
So the good news is you have made money, but the bad news is you have to pay the tax man. Same old story, right? Well, maybe not. Distributing gains and paying the taxes this year may not be all bad because it’s beginning to look like tax rates will increase in the near future. Under current tax law, rates will increase in 2011 with capital gains rates increasing to 20% (or 10% for taxpayers in the bottom two brackets). Depending upon the outcome of the 2008 Presidential Election, it is possible that rates may increase before 2011 and potentially to rates even higher than 20%.
While paying taxes may not always be a bad thing, we certainly would not argue that it’s a good thing either. With that said, we continue to manage portfolios in a tax efficient manner. The mutual funds we use are more tax efficient than most. Capital gains taxes in our clients’ accounts will likely be a bit higher than in previous years, but we are okay with accelerating a reasonable amount of income given that current tax rates are probably the lowest they will be for the foreseeable future.