As with all investment types, you’ll have to pay taxes on your mutual fund returns.Depending on when you bought or sold the mutual fund, you will have to pay capital gains taxes or ordinary income taxes. If you didn’t sell the fund, you’ll still need to pay taxes on any dividends paid out to you. You may also want to work with a financial advisor to help map out the tax obligations on your investment horizon.
When Do I Pay Taxes on Mutual Funds?
Wherever investment returns are being earned, you know Uncle Sam will be nearby. Mutual funds are no different, though you may encounter a few different types of taxes on income from them. Here are the two points following which you have to pay taxes on mutual funds:
Sale of Mutual Funds
The obvious reason you’ll need to pay taxes on a mutual fund investment is if you sold off shares of it in a given year. After all, you’ll receive funds in exchange for the sale.
When selling mutual funds, your broker should send you a tax document detailing the sale. At the end of the year, make sure to consider the capital gains listed on this form when filing your taxes.
Mutual Fund Dividends
If your mutual fund pays out dividends, then you’ll have to pay taxes on that income. Generally, dividends paid out will be ‘qualified’ dividends.
At the end of the year, your brokerage company should send you a tax form that details all of the dividends paid to you from a particular fund. This tax form is called1099-DIV.Don’t forget to report this income when you file your taxes.
How Much Will I Pay inTaxes on Mutual Funds?
Whether you are selling your mutual fund shares or receiving a dividend, there are taxes to be paid. Here are some rates you can expect when paying tax on mutual funds:
Qualified Dividends
If you receive qualified dividends, then you’ll pay a special tax rate on that income. That’s because qualified income is taxed at more preferential rates since they were held longer. More specifically, you’ll pay 0%, 15%, or 20% on qualified dividends based on your income bracket and filing status. Thresholds for four kinds of filers are below for the 2021 tax year.
Taxes on Mutual Fund Qualified Dividends – Tax Year 2021 (filed in 2022)
| Status of Filer | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
| 0% | $0 to $40,400 | $0 to $80,800 | $0 to $40,400 | $0 to $54,100 |
| 15% | $40,401 to $445,850 | $80,801 to $501,600 | $40,401 to $250,800 | $54,101 to $473,750 |
| 20% | $445,851 and higher | $501,601 and higher | $250,801 and higher | $473,751 and higher |
Here’s a breakdown of the same tax rates for the 2022 tax year:
Taxes on Mutual Fund Qualified Dividends – Tax Year 2022(filed in 2023)
| Status of Filer | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
| 0% | $0 to $41,675 | $0 to $83,350 | $0 to $41,675 | $0 to $55,800 |
| 15% | $41,676 to $459,750 | $83,351 to $517,200 | $41,676 to $258,600 | $55,801 to $488,500 |
| 20% | $459,751 and higher | $517,201 and higher | $258,601 and higher | $488,501 and higher |
Ordinary Income
When selling mutual funds, you will encounter capital gains taxes or ordinary taxes. Depending on your situation, you may need to pay long-term capital gains tax or short-term capital gains tax.If you’ve held the mutual fund for less than a year, that amounts to a short-term capital gains tax. A short-term capital gain will count as a part of your ordinary income. With that, you’ll pay the tax rate that applies to your ordinary income for the year.
Depending on your situation, your ordinary tax rate may be much higher than what you’d pay in long-term capital gain taxes. In many cases, it can make sense to hold off on selling a mutual fund until you’ve passed the one-year mark. But talk to your financial advisor to determine the most efficient tax strategy when considering selling a mutual fund.
Capital Gains Income
If you’ve held the asset for more than a year, that’s considered a long-term capital gain. In that case, you pay either 0%, 15%, or 20% on the capital gain. Look below to see the tax rates and brackets for the 2021 tax year:
Taxes on Mutual Fund Long-Term Capital Gains – Tax Year 2021 (filed in 2022)
| Status of Filer | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
| 0% | $0 to $40,400 | $0 to $80,800 | $0 to $40,400 | $0 to $54,100 |
| 15% | $40,401 to $445,850 | $80,801 to $501,600 | $40,401 to $250,800 | $54,101 to $473,750 |
| 20% | $445,851 and higher | $501,601 and higher | $250,801 and higher | $473,751 and higher |
Below are the tax rates for the 2022 tax year:
Taxes on Mutual Fund Long-Term Capital Gains – Tax Year 2022 (filed in 2023)
| Status of Filer | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
| 0% | $0 to $41,675 | $0 to $83,350 | $0 to $41,675 | $0 to $55,800 |
| 15% | $41,676 to $459,750 | $83,351 to $517,200 | $41,676 to $258,600 | $55,801 to $488,500 |
| 20% | $459,751 and higher | $17,201 and higher | $258,601 and higher | $517,201 and higher |
As you can see, most filers will pay either 0% or 15% in capital gains tax when selling a mutual fund. But it is possible, your income will warrant a 20% capital gain.In any case, long-term capital gains taxes are typically less of a tax burden than paying ordinary income tax.
Bottom Line
If you are investing in mutual funds, be prepared to pay taxes at multiple points. First, you’ll need to pay taxes on any dividends you receive from the fund while you hold it. And of course, you’ll need to pay taxes on any capital gains you earn from the sale of the fund.Don’t let these tax implications take you by surprise!
Tax Planning Tips
- Planning your taxes for the year can be difficult, especially when you start working in investment income. A financial advisor can help with this, though. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use our no-cost federal income tax calculator to get a quick estimate of what you’ll owe the government.
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