Phillip G. Sinclair

Certified Public Accountant
310 North First
Longview, Texas 75601
Fax 903-753-5982

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Regarding mutual funds (and other investments), they can get confusing.

Following are a couple of questions that I am frequently asked.

Q. Is it better to take the capital gains and dividends and then reinvest or just let the fund reinvest all gains and dividends as they occur?

A. By reinvesting the dividends in mutual funds, there is no "load" or commission to pay, so you "get more for your buck" than if you were to receive the dividend then purchase more shares and pay the commission. Additionally, many funds have a minimum amount that can be invested each time, so if you receive a $25 dividend and the minimum investment is $100, you would have to come up with the extra $75 cash, or only invest every 4 months.

Q. What is all this you read about with mutual funds you have to be careful because of double taxing? You would assume you pay taxes as they occur, therefore when the funds are cashed out, why should you again be taxed on the amount you take out?

A. Many taxpayers who end up not keeping track of their "cost basis" do end up paying double taxation. You should keep detailed records of the original purchases, additions to the original cost which includes the dividends and capital gains that are reinvested, and the additional shares purchased as additional investments. Since you will have paid tax on the dividends and capital gains, this can be added to the tax basis which would increase your tax basis. That way, you will only pay capital gain tax on the amount received over the adjusted tax basis. (Note that this is not true for retirement accounts since they are not taxed until withdrawn.  Roth IRA's are never taxed.)

I hope this clarifies for you the recordkeeping that you must keep if you own investments and don't want to be double taxed.

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Last Updated 02/14/2000