Investors Will Pay a Record Sum in Taxes From ’98 Mutual Fund Gains

U.S. investors will pay a record $40 billion in mutual-fund-related taxes from gains generated by their funds last year, according to estimates from fund companies.

That’s up 18% from the $34 billion investors paid to cover 1997 fund-related taxes, according to an estimate Monday from Colonial Group Inc.

“Taxes on mutual funds keep going up,” said James Blakeslee, who oversees tax strategies at Colonial, a unit of Boston-based Liberty Financial Cos.

Investors create taxable capital gains when they sell their fund shares at a profit, of course. The tax bill that aggravates many fund investors, however, is the bill they get simply for buying and holding, while their fund managers generate trading gains that must, by law, be paid out to fund owners each year--and taxed accordingly.

Analysts noted that the 1998 tax bill is going up sharply even though Congress reduced the long-term capital gains tax rate to 20% from 28% as part of the 1997 Taxpayer Relief Act.

About half the $3 trillion invested in stock funds sits in tax-deferred accounts such as IRAs or 401(k)s, Blakeslee said. For those investors, annual capital gains payouts don’t generate taxes, and thus aren’t a concern.

It’s the remainder of the fund assets--the money in fully taxable accounts--that can benefit from some sort of tax-managed strategy, analysts note.

Investors can minimize taxes by choosing fund managers who try to limit capital gains taxes by holding stocks for longer periods, Blakeslee noted. These funds are known as “low-turnover” funds.

A fund’s turnover rate--the pace at which securities in the portfolio are bought and sold--is disclosed in the prospectus and in financial statements mailed to shareholders twice a year. A low annual turnover rate might be any figure under 50%.