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Avoiding taxes?
Old 08-21-2007, 09:15 PM   #1
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Avoiding taxes?

I own an international bond fund - American Century International bond - BEGBX - that is basically flat for the year. Just up a couple hundred dollars.

They only distribute capital gains and dividends at the end of the year - not monthly as some other international bond funds do (PFUAX and RPIBX, for instance).

My question is simple (I hope!) - if you have a mutual fund that has not gained much since you bought it, and you know a distribution is coming up, isn't it smart to sell the fund before the distribution and then re-buy afterwards? The fund price will drop equal to the distribution, but there won't be any taxes due this year...

Other than capital gains taxes in the case of a run-up (not true in this case), or a wash sale, is there any reason not just to sell, avoid the taxes, and then re-buy? Am I missing something?

On a different note, do all of you ER'ers out there file estimated taxes? What a royal pain-in-the-ass...

Thanks...
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Old 08-21-2007, 09:43 PM   #2
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Sure. If there is no loss, then you don't even need to worry about the wash sale rules.

Audrey
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Old 08-21-2007, 10:04 PM   #3
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Presumably the NAV includes the embedded gains from unpaid dividends. So if you sell every year for a gain before the distribution, you get taxed at the ST cap gains tax rate which is -- drum roll -- the same as your marginal income tax rate. So how do you save taxes? Then you re-buy and the time for ST vs LT starts anew. You never move into the favorable LT holding period.
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Old 08-22-2007, 09:11 AM   #4
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He states that he currently has NO GAIN in the fund. Therefore, even if the NAV includes the distribution, he would be taxed on the distribution even if the fund had NO GAIN for the year. The unfortunate thing about mutual funds is that you can end up paying taxes even if your fund lost money in a given year. It happened to a lot of people in 2000.

Therefore in this case since selling the fund will show little or no gain, it makes sense for him to avoid the distribution.

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Old 08-22-2007, 10:05 AM   #5
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I disagree.

If he has a gain now and does not sell, then he will presumably get a distribution. He can pay taxes on the distribution (probably short term) and if the distribution is substantial enough, sell and book the short term loss.

If he has a gain now and sells, he will pay taxes (probably short term) on his gain.

I think the above 2 scenarios probably come out about the same tax-wise. By not selling now he has the possibility that he can go long-term on unrealized cap gains and get better tax treatment.

If he has a loss, he should sell for tax-loss harvesting anyways. If he doesn't have a loss now, he can afford to wait until the amount of the distribution is announced and then do the math.
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