Re: Please help - question on Mutual Funds
I recently increased my investments in mutual funds (after tax dollars) and this year I was astonished to see how much in capital gains distribution I had to report on my taxes.
By "recently", did you invest just prior to the distribution? If so, then you learned an investment lesson that you should wait until after a distribution so that you aren't taxed on money that hasn't been working for you.
At the point that one withdraws/liquidates mutual funds, do they pay taxes only to the extent that they've withdrawn more than they've contributed?
Yes, also adding in the distributions. See below.
Also, all the capital gains distribution that I am now paying taxes on, I imagine should be added to the cost basis. If this is the case, how does one keep track of all these cap. gains distributions to determine what gain, if any in the future that one needs to pay taxes on when the fund is liquidated?
Keep your statements. For computing cost basis, all you have to do is treat the shares received via distributions exactly as if you had purchased them yourself. The cost of those shares will be on your statement.
When you liquidate, the IRS gives you a couple of options for computing the basis. You can do an averaging method or you can compute the actual basis of the specific shares you sell.