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Friday the 13th tax tips to ward off investment tax scares

This second Friday the 13th of 2015 is pretty scary for folks with money in the stock market. With just about an hour left in the trading day, the Dow, Nasdaq and S&P 500 are all down.

Stock-market-quotes-mostly-down (2)Sure, the drops are just fractional. And reasoned, dedicated investors know that markets fluctuate, sometimes wildly. If you have a good long-term investment plan and are patient, you should come out OK.

Still, if like the hubby and me you're hoping to return sooner rather than later, you probably double clutch a bit whenever the market goes down even a little.

But, as four of this week's five Daily Tax Tips show, regardless of whether your holdings take off or tank, you have tax options.

The timely tax and investment advice, along with a fitting Friday the 13th tax feature, for March 9 through March 13 are:

  1. The many capital gains tax rates (Monday, March 9, 2015) 
  2. Tax benefits of capital losses (Tuesday, March 10, 2015)
  3. Writing off worthless stock (Wednesday, March 11, 2015)
  4. Reporting investment income (Thursday, March 12, 2015)
  5. 5 terrible tax surprises (Friday, March 13, 2015)

Heck, just to keep this week's financial assets theme going, let's add a sixth investment related tax surprise to today's special scary tip: Don't get a tax shock from earnings that you don't see.

DRIPs, distributions and d'oh: This is the case when you have your asset's interest and dividends automatically reinvested via direct reinvestment plans, or DRIPs. Even though that cash doesn't pass through your hands, it's considered as constructively received by you.

That means you could have spent it if you wished. And that means the Internal Revenue Service counts it as taxable income.

Since the tax man gets a copy of your 1099s detailing these earnings, he expects you to include the amount on your 1040. If you don't, you'll hear about, along with a bill for the tax you should have paid plus interest.

Similarly, don't be surprised by taxable gains in mutual funds even when the overall holding or even the market didn't do so well.

Fund managers sell assets throughout the year, passing along a portion of any gain from those sales to the individual shareholders as capital gains distributions. In this case, shareholders owe tax on their portion of the gain even though their fund's overall value may have dropped in a chaotic market.

Mutual funds are an easy and generally good way to invest. But note that because you're not in total control of the investment, you could suffer the tax costs of someone else's actions with your money.

As the old saying goes, don't let the tax tail wag the investment dog. But do be aware and assess your portfolio accordingly.

Keeping up with tax tips: The Daily Tax Tips show up each weekday -- sometimes early, sometimes late -- in the upper right corner of the ol' blog's home page. If you miss one there, check back on Friday (usually) for the weekly round-up.

And if you want even more tax tidbits, feel free to spend time at the January, February and still-growing March tax tip pages.

Now get out of here and get a head start on a great, non-scary and tax-saving weekend!


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