Mutual fund distribution and tax?

I heard that you have to report income from mutual fund distribution and there's general advise not to buy funds near year end because of you will have to pay tax for entire year distribution.

If a mutual fund has income distribution (say around $5/month) every month, and I buy it after Jan 1, 2007, do I need to report it in my 2006 tax?

If I buy it on Nov 15, 2006, do I report $5 income (for Dec 1 distribution) or $60 (total distribution by the fund for entire year) ?

Most mutual funds distribute their annual income at a single day in the year. If you own the fund on that day, you get taxed on the income of the fund for the entire period up to distribution, even if you bought the fund the day before.

If you buy it after January 1, 2007 then there will be no income tax impact for 2006, as you did not own the investment in that year. If you buy it November 15th, then you will have to report as income any distributions that occur after that date.

The fund prospectus should tell you what date(s) the fund distributes income so you can take that into account when purchasing an investment.

Download a copy of Turbo Tax for $39.99 and it will answer those questions, pay for itself and give you the maximum return.

The mutual fund will send you a statement once a year showing the total distributions. That's the number you'll report on your tax return.