The battle cry of last year's tax cutters was to put an end to the double taxation of corporate dividends. They didn't quite succeed, but the rate on dividends was slashed from as high as almost 40% to just 15% ... and 5% for taxpayers in the 10% or 15% tax bracket. Now it's up to you to make sure you don't throw away the savings.
That's a real threat if you invest in mutual funds and, like most investors, automatically reinvest your dividends. If you sold shares last year, you got a form 1099-B from the fund showing how much you got. You need to subtract what you paid for the shares, your so-called tax basis, to see if you have a taxable capital gain or a tax-saving loss.
And here's the rub: Don't forget that your basis includes all the dividends you reinvested while you owned the fund. Each reinvestment bought new shares with dividends that had already been taxed twice: once at the corporate level and once on your own tax return. If you forget to increase your basis, those same dividends will effectively wind up being taxed a third time.
Let's say you bought $5,000 worth of shares several years ago and sold last year for $8,000. At first blush, it might look like you have a $3,000 capital gain. But if you reinvested $2,500 over the years your gain is just $500.
If you're not sure about your basis, call the fund's toll-free number for help. Most funds now keep track of investors' average basis, and that can be a real help at this time of year.
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