Small-cap stock funds and high-yield (“junk”) bond funds may make large capital gains distributions this year. The same is true in sectors such as gold and real estate, which mostly dodged the 2000-2002 bear market and have no recent losses to offset current gains.
Investors in such funds, held in a taxable account, should contact fund management between now and the end of the year. Find out whether the fund already has an estimate of its gains payout or when it will announce its distributions. Then, factor such a distribution into your year-end planning.
Say you have net capital gains of $4,000 so far this year. Your funds expect to make $2,000 worth of capital gain distributions by year-end, bringing the total to $6,000. In that case, you could take $9,000 worth of losses by year-end, winding up with a $3,000 net capital loss, the largest amount you can deduct right away. Also, you should avoid making new investments in such funds until after they make distributions and their share prices have fallen.
