Tax Bill May Climb Next Year

This year’s roller-coaster stock market means that your mutual fund manager probably bought and sold more stock than usual. And that means you may get a larger capital-gains distribution from your fund company this year, as well as a bigger tax bill.

“I suspect there will be more turnover of technology, financial services and leading multinational company stocks, like Coca-Cola and Gillette, because of the volatility of the market,” said A. Michael Lipper, president of Lipper Analytical Services Inc. of Summit, N.J. Those kinds of stocks are held by many general mutual funds as well as sector funds, so the effect should be widespread.

If all your funds are in 401(k) or individual retirement accounts, which are tax-deferred, you don’t have to worry about the tax man. But if you have money in taxable accounts, you had better hope the fund manager sold at a time that will get you the lowest capital-gains rate. But don’t bet on it. Fund managers usually trade shares when they think they should, regardless of the tax consequences.

Anyway, you’ll find out in January when you get the 1099 tax form from your fund company. This is the form that tells you what your capital gains were and at what rate they will be taxed - thus, how much you owe.

Last year it was simple. You paid your ordinary tax rate, up to 39.6 percent on shares held less than a year, or you paid a 28 percent capitalgains rate on securities held more than 12 months. Easy.

Then came taxpayer relief. Short-term capital-gains tax rates remained the same. But the fund companies now had to figure out how long they held securities that were sold from May 7 through July 28. More than 12 months, and the gains are to be taxed at a 20 percent rate. But those held longer than 12 months and sold before May 7 face a 28 percent rate; between 12 and 18 months, sold after July 28, a 28 percent rate. Securities held more than 18 months after July 28 will be taxed at 20 percent. (Those who qualify for the 15 percent tax bracket pay only 10 percent.)

Most fund-company officials said they would have brochures to explain the tax form changes, and the Investment Company Institute also is preparing one for fund companies and investors.