Mutual Funds and Taxes for 1st Time Investor

[jnh978]

What is the name of your state? Massachusetts

I will be investing about $20,000 in a porfolio of mutual funds probably in January after the distributions for the funds go out. It will be about 70% equity and 30% bonds. It will be an individual account not a retierment account.

I am currently a student and have a part time job. I've done a little reseach and I've found the following (someone correct me if i'm wrong)

until I make above $29,000 per year in earned income, I will be in one of the bottom two tax brackets and therefore will pay only 5% for dividends and LT capital gains.

I know that even if I reinvest the distributions, I will still be taxed on them, but what if I do not sell the funds for years at a time?
Will the taxes owned be deferred or will I still need to file and pay each year?

Will AMT affect me?

I read somewhere that either state sales tax or state income tax can be tax deductible on the federal level, is this true?

Any other tax advice for a first time investor?

Thank you!

 

[anteater]

A couple points:

1) It is your taxable income, after personal exemption and standard/itemized deductions, that determines the rate you will pay on qualified dividends/LT gains.

2) It is qualified dividends that are eligible for the reduced federal rate. Mutual fund distributions retain their original character for tax purposes. Most of the distribution you receive from the taxable bond funds will be interest and taxed as ordinary income. Municipal bond fund interest distributions would be tax-exempt, but probably not worth it in your tax bracket.

3) When you sell the fund(s), you will realize a capital gain/loss, the difference between the selling price and your adjusted cost basis, that is, your purchase price plus any reinvested dividends.

4) AMT -- not likely in your tax bracket.

5) If you aren't already, why not set up deductible IRA/Roth IRA. Sounds like you would be eligible. Put your allocation to bonds in the IRA where the interest will be tax-deferred. The tax on the interest might not be too great right now when you are in a lower tax bracket, but as your income rises, you might be paying 25% or higher on those bond fund distributions.

 

[abezon]

Mutual fund dividends include the dividends that the fund received from the stocks it owns (usually qualified), the short term capital gains a fund makes if it sells a stock at a profit after less than a year, and interest the fund receives from bonds it holds. The interest can be corporate/federal (taxable) or municipal (non taxable). Capital gains dstributions are the profits a fund realizes when it sells a stock/bond after owning it for more than a year. You pay income taxes on the investment fund income each year; IRA income is taxed when the money is withdrawn, if at all.

If you're going to be invested for a while (5 years or more), the main income may come when you sell the stock. See a financial advisor about what investments are best for your IRA, Roth IRA, 401k, & investment accounts. Talk to friends & interview at least 3 people before hiring someone to watch your money. You'd interview 3 people before hiring someone to watch your kids, right?

State taxes are deductible on schedule A if you're itemizing. If you claim the standard deduction because it's bigger, you do not also get to deduct state taxes.