Fund Execs Urge Congress to Defer Taxes on Reinvestments

Leaders of the mutual fund industry urged Congress on Friday to allow fund shareholders to defer taxes paid each year on reinvested capital gains distributions.

“As part of the economic stimulus package, we urge you to consider a measure that would defer certain taxes on the savings of tens of millions of middle-income taxpayers, quickly free substantial funds for consumers and encourage long-term investment in our economy,” the Investment Company Institute wrote in a letter to Rep. William M. Thomas (R-Bakersfield), chairman of the House Ways and Means Committee. The plea was signed by 74 fund company executives.

Fund investors are required to pay taxes each year on capital gains distributions paid by their fund, even if they reinvest these distributions and don’t sell any fund investments. Funds must distribute any net capital gains annually to shareholders to avoid a tax hit themselves.

Because fund customers usually reinvest their distributions, they are “understandably frustrated that a tax still occurs,” the industry leaders wrote.

Deferral would postpone--but not eliminate--the tax payment. Investors would have to pay taxes on all accrued distributions upon selling a fund, but in the meantime they would have more money to invest and more control over their annual tax planning.