Bill Would Offer Tax Relief

Mutual fund owners who think they are avoiding capital gains taxes are frequently surprised to find out otherwise when the tax bill arrives at the beginning of each year.

Indeed, fund owners often pay taxes annually on the capital gains, or profits, on the sale of stocks included in their funds. And mutual fund capital gains are assessed despite the fact that the investor, or fund holder, had nothing to do with the sale, since it was instigated by a fund manager.

What’s more, some fund owners may find themselves paying capital gains taxes at the end of the year on a fund whose shares decreased in value. That would occur if a stock within a fund increased in value and was sold by the fund manager while the value of the fund itself tanked.

Investors who own individual stocks, meanwhile, only pay capital gains taxes after they sell their stock at a profit _ a one-time expense.

Rep. Jim Saxton, R-N.J., hopes to mend that discrepancy. Saxton, chairman of Congress’ Joint Economic Committee, has introduced a bill that would defer up to $3,000 in taxes $6,000 for couples if investors automatically reinvest capital gains distributions directly back into their funds.

Payment of capital gains taxes would occur only after the fund holder sold out of the mutual fund.

The bill, introduced last month, is now pending before the House Ways and Means Committee.

Analysts see several benefits to investors if Congress passes the bill.

First, it puts more money in the hands of fund owners by deferring their mutual fund-generated capital gains taxes. Ideally, some of that extra money would be put aside for additional savings toward their childrens’ college funds or retirement.

In addition, the bill would ostensibly encourage long-term investing by making it profitable for fund holders to reinvest their capital gains distributions directly back into their funds.

Finally, investors would benefit even if they eventually sold their fund shares after holding onto them for several years. That’s because long-term capital gains are taxed at 20 percent, whereas short-term capital gains are taxed at a higher rate of 28 percent.