How and Why You Can Have Year-End Taxes on Mutual Funds

The new year is here and that means it’s time to start collecting tax forms for your tax preparer. Some forms might show taxable income on one or more of your mutual funds. This comes in the form of a 1099 showing year-end capital gains and taxable dividends. A higher-than-expected tax bill is not uncommon for committed investors. Here’s why:

A “mutual fund” is managed by one or more investment managers and that entails buying and selling various stocks and bonds to carry out the fund’s strategy. Buying and selling decisions can be based on several factors, including risk avoidance or simply rebalancing the fund according to its overall objective. The buying and selling can take place several times throughout the year within the fund itself. An investment that is sold for a gain within the mutual fund creates a profit. By law, mutual funds MUST distribute the net gains to investors by the end of the year.

Investor redemptions can also trigger capital gains. If enough investors, or their financial advisors, need to sell all or a portion of the fund for cash needs, the mutual fund managers often must sell some investments within the fund to raise the cash needed to pay out to the investors. Any gains resulting from the sale must be distributed out to investors by year’s end.

As a result of the factors above, sometime in December most mutual funds issue year-end capital gains distributions to investors, which have to be listed on the investor’s tax return if the fund was held in an after-tax brokerage account. Mutual funds held in tax-deferred retirement plans like IRAs and 401ks do not carry out taxes each year to the investors. Instead, the investor pays taxes on tax-deferred accounts only when they make a withdrawal from the IRA or 401k.

In some ways, the whole mutual fund tax issue falls under the “good problem to have” category because taxes mean the fund likely did well for the year (but not always). With the gains of 2025, be prepared for the fact that you will likely see a 1099 on your after-tax brokerage account that lists taxable gain and dividends, even if you held on to the fund for the whole year. Now you know why.

Fun Fact: The first real mutual fund was the Massachusetts Investor Trust (MITTX) which was started on March 21, 1924. A $1,000 investment in the fund in 1924 would be worth $7,067,000 today.

Does it Really Take $5 Million to Achieve the American Dream?

I came across an interesting article last week in USA Today referencing a survey done by the online platform Investopedia. As that name suggests, Investopedia is encyclopedic in terms of the various financial topics it delves into. They went out to answer the question “What does it take to achieve the basic American dream?” They asked 1,263 adults to identify goals that they associate with the American dream and most came up with these eight categories:

1. Retire comfortably.
2. Afford quality healthcare.
3. Own a home.
4. Raise a family.
5. Own a new car.
6. Take an annual vacation.
7. Care for pets.
8. Have a wedding.

The folks at Investopedia then attempted to tabulate the lifetime costs of each goal, looking at data from federal agencies, think tanks and industry groups. Based on that research here are the lifetime costs associated with each goal, from largest to smallest:

1. Retirement: $1.6 million.
2. Owning a home: $957,594.
3. Owning a new car: $900,346.
4. Raising two children and paying for college: $876,092.
5. Healthcare: $414,208.
6. Annual vacations: $180,621.
7. Pets: $39,381.
8. Wedding: $38,200.

If you add all those up, you get $5,043,323 needed over your lifetime to achieve “the American Dream.” USA Today goes on to point out that the average American with a bachelor’s degree earns roughly $2.8 million over his or her career. Wow, those two numbers don’t add up well. And the costs are going up. Over just the last year the lifetime cost for purchasing and maintaining new cars went up by about $88,000 while the lifetime homeownership cost went up by about $28,000.

Before you fret too much for yourself or your kids, be aware that there is some controversy associated with this study. Some experts believe that the numbers above are those enjoyed by the top 10% of income earners and that everyone else can achieve their dreams at a lower cost. I still think that the numbers above serve as good reminders of just how much of a financial commitment goes into enjoying the life to which many of us aspire. Keep the faith, you can achieve the American dream if you haven’t already.

Fun fact: As we usher in the new year you should know that 2026 will actually have 53 weeks instead of 52. That’s according to the ISO standard which counts week starting on Monday and ending on Sunday. The extra week is occurring because January 1, 2026, fell on a Thursday making the year contain 365 days but more than 52 Monday to Sunday cycles.

107, 104 and 82

The three numbers above seem arbitrary. They’re relatively small if you’re talking about dollars and cents. But what if I told you the first number (107) is the age of a new client (I’ll call her Lena for privacy’s sake) I met just before Christmas; the second number (104) was the age of Lena’s husband who died several weeks ago; and the third number (82) is the number of years they had been married at the time of the husband’s death. Just to give you more context, the longest marriage in the US lasted 83 years and the longest marriage anywhere on record is 86 years. When my assistant, Cindy, gave me the detailed phone message, I thought it was a hoax.

I was told that despite being a little hard of hearing (primarily based on her refusal to wear one of her two hearing aids), Lena was clear thinking and somewhat self-sufficient. She and her husband lived alone together in a two-story colonial up until his death. Sure enough, the person I met was a little slow of gate and a bit hard of hearing, but she followed along, asked good questions and was dressed to a T as well!

I learned some amazing things about Lena and her family. Including:

1. She and her husband played golf until he was 100 and even drove to Myrtle Beach annually to get in some golf rounds.
2. She and her sister (still alive at 102) were both original Rosie the Riveters, working in General Motors plants in Detroit making military equipment during WWII.
3. I found nothing particularly unique about her lifestyle. She was very social as was her husband, and they enjoyed an occasional cocktail and travelled extensively.

She never complained in my office or got fidgety during the hour-long session. Heck, she didn’t even need to use the bathroom after the meeting (unlike me, lol). And she told me she was as surprised as anyone by the length of her life.

Opportunities for me to cross paths with unique people like Lena are what makes my practice worthwhile. I’ve heard and witnessed great stories of commitment, perseverance, and compassion over my decades of estate and financial planning. If you’re reading this then we’ve likely sat down in my office several times over the years to “get things in order.” You, too, have given me a story, however large or small, that encouraged and/or inspired me. Thank you!

P.S. As I finished writing this it dawned on me that this could be taken as my “farewell” message. No way! I recently emblazoned three numbers in my head – 107, 104 and 82. See you soon!

Fun Fact: Rosie the Riveter wasn’t a single real person, but an iconic symbol for the millions of American women who worked in factories and shipyards during World War II, producing munitions and war supplies, with several real women inspiring the image, most notably Naomi Parker Fraley, whose photo became the basis for the famous “We Can Do It!” poster. Naomi lived to age 96.