Each year your mutual fund company will send you a summary, detailing any dividend and/or capital gain distributions you have received. Bear in mind that taxes on all fund earnings must be paid in the year in which they are earned, whether they are credited to your account or paid to you in cash. Taxes assessed on earnings or gains from mutual fund investments can be complicated. You would be wise to consult with a tax advisor for information regarding your personal tax situation.

Some possible federal tax implications are outlined below.

• Short-term capital gains distributions occur when the fund manager sells securities held in the portfolio for one year or less. These distributions are taxed as ordinary income in the year they are received, regardless of whether the distributions are reinvested in your account or are paid to you in cash.
• Dividend (qualifying) distributions are taxed as long-term capital gains as of January 1, 2003 through December 31, 2008. Long-term capital gains are gains realized when securities are sold after being held in the fund for longer than twelve months. The tax rates for these gains will vary depending upon your tax bracket.

Bear in mind that you can minimize taxable capital gains distributions by investing in funds with low turnover — ones where the manager does not actively buy and sell stocks on a regular basis, but instead uses a buy-and-hold strategy (e.g., index funds).

Profits from selling your mutual fund shares will be taxed at the applicable capital gains tax rate (i.e., long term or short term). Note that transfers of shares between funds in the same family — for instance, from a growth fund to an income fund — are considered a sale of one fund and a purchase of another for tax purposes. Accordingly, you are liable for taxes on gains from the sale of both the first and the second fund.

How much you owe in taxes after you sell shares will be determined, in part, by the difference between what you paid including all fees and what you sold your shares for. This is called the cost basis. Often, the company will provide you with a year-end cost-basis statement. Because there are different ways to determine cost basis, it is wise to consult an accountant or tax advisor when considering the sale of mutual fund shares. Your personal tax circumstances and other factors may dictate a specific manner of cost basis calculation.