Advice to taxpayers on mutual fund distributions and charitable giving

It’s not just what you do that matters. It’s also when you do it.

The right timing could be especially important for many mutual fund investors thrilled with this year’s strong stock market gains and considering major new investments in stock funds for their taxable accounts before the end of the year. It’s easy, even for savvy investors, to ignore what can be a nasty tax problem, one that can usually be avoided with smart timing.

Taxpayers could have many other important timing issues to consider if Congress approves historic tax increases in the coming weeks. But since our crystal ball is in the repair shop and no one we have met is sure what lies ahead, these subjects will have to wait another day. In the meantime, here is some advice from tax and investment professionals on the subject of mutual funds and a few other topics that could benefit many taxpayers.

Fund payments

With stock indexes having risen again this year, now is a good time for our annual reminder of why many investors might benefit from researching the year-end capital gains distributions planned by mutual funds. investment, in particular equity funds. “It looks like big capital gains distributions will be a problem again” for many fund investors, says Christine Benz, director of personal finance and retirement planning at Morningstar. Inc.

Before investing in a fund for a taxable account, check whether the fund anticipates a large distribution of capital gains later this year and, if so, when and how big it will be.

Here’s why it can be important: Mutual funds typically distribute their net realized capital gains to investors at the end of each year, typically in November and December. Check their websites for more details. If you are investing for a taxable account, these payments are generally subject to tax, even if you purchased these shares shortly before the payment eligibility date. (This is not a problem for investments in tax-efficient accounts, such as an IRA.)

So, if a fund is planning a large payout that would significantly increase your tax bill for that year, consider waiting to invest in that fund for a taxable account until after the payout eligibility date. Or think about other options, such as buying the fund in a tax-advantaged account or diving into another fund that wouldn’t have a significant tax impact. For more thoughts on this topic, see this information document by T. Rowe Price.

Among those who have followed this issue closely for many years is Mark Wilson, president of MILE Wealth Management in Irvine, California. Mr. Wilson has distribution information on his website, including a “bitchy” list of funds with particularly large payouts as a percentage of net asset value. Early reports indicate that 2021 will be a much bigger year for major distributions than in recent years, Wilson said. As he points out, getting such a large payout might sound wonderful, but it could also create a surprising tax bill for many unsuspecting investors.

Charitable gifts

Last year, the limits on the amount of your cash donations that could be deducted were temporarily suspended, said Mark A. Luscombe, senior federal tax analyst at Wolters Kluwer Tax & Accounting. (Cash includes things like checks and credit cards.) This change, which also applies to 2021, generally allowed donors to deduct eligible donations totaling up to 100% of their adjusted gross income. Previously, there were limits that typically ranged from 20% to 60% of the AGI and varied depending on the type of contribution or type of charity. Donations to donor-advised funds are not counted for this provision.

This could be a significant change for donors who wish to make particularly large donations, says Luscombe.

Some other reminders about donations:

• When donating stocks and other securities to charity, many investors who detail their deductions donate “highly regarded” securities that they have owned for over a year and whose value has risen. sharply. Disclaimer: Don’t donate securities that have fallen in value since you bought them, says Drew Moss, certified financial planner at Summit Financial LLC in New Jersey. Instead, consider selling those losers, creating valuable capital losses that can help lower your taxes, and donate the proceeds to charity. For more ideas on charitable giving and the history of capital loss, check out my September column.

• Pay attention to the fine print on how to document donations. Most of the charities I know do a great job sending their donors the required thanks, which can be very important if you are audited. But sometimes a few small organizations do not provide such recognition. Here is just an example: Suppose you donate more than $ 75 to a charity. If you haven’t received anything in return, like a free dinner or tickets to a popular sporting event, the charity is usually supposed to say so. I recently received a receipt from a charity that did not include these keywords, and had to request a new one, which I received.

• If you got something in return, the charity is usually supposed to estimate the value of what you received and inform you that your deduction is usually limited to the excess over the value of the goods and services that the charity received. charity provided you. It can be tricky. The IRS offers this example: Suppose you donated $ 100 to a charity that gave you a concert ticket worth $ 40. It’s what tax geeks call a “quid pro quo” gift. The IRS says the charitable contribution portion is only $ 60. “Even if the portion of the payment available for deduction does not exceed $ 75, a disclosure statement must be filed because the donor’s payment (matching contribution) exceeds $ 75,” the IRS said on his website.

There are exceptions to this rule, such as when goods or services donated to you by a charity have “insubstantial fair market value”. Examples would include symbolic elements such as bookmarks, calendars or mugs bearing the organization’s name or logo.

IRS Publication 526 has much more details on charitable giving.

The 14 day rule

This is nothing new but often surprises readers: If you rent out your home for 14 days or less each year, the rental income you receive is not taxable. These 14 days must not be consecutive either. It’s a break particularly well-known in many high-rent places, like the Hamptons in New York City. But if you rent the house for more than 14 days, the full amount is taxable. Keep good records.

Mr. Herman is a writer in California. He was previously the Tax Report columnist for the Wall Street Journal. Send your comments and tax questions to [email protected]

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