Tax Consequences of Our Taxable Investments for 2006

The first tax document for 2006 arrived over the weekend from T. R. Price. Currently, I own three T. R. Price funds in my taxable accounts: PRSVX, PRNEX, and TREMX. The reason I call these taxable accounts is to separate them from tax deferred accounts such as 401(k)s and IRAs. The name also says that I am responsible for taxes resulted from the distributions of these accounts. 

2006 was a great year for investors, including us, as we saw big gains in our investments. While we were happy with the growth of our net worth at a peace that exceeded our expectation, paying back a chunk of the gains as taxes is not nearly as enjoyable. When I started to invest in mutual funds outside 401(k)s and IRAs, I didn't pay much attention to the fund's distribution and the funds I chose didn't pay out big numbers in the past. At that time, the number of shares we owned were small and the distributions weren't really a problem. As we kept adding shares, the distributions from dividends and capital gains were getting bigger and bigger every year. Now the tax consequences from these distributions can no longer be ignored. 

For 2006, we received the following distributions from our investments in taxable accounts, including stocks, mutual funds, and savings. I also call these distributions "passive income" as they come as a natural result of our investments which require a little or no effort.

The total passive income from investments in 2006 were $9,053.02 and these are the net addition to our active income that we made from our salaries. In other words, they will have a huge impact on our tax bill on April 15th, as I don't expect for any refund. Fortunately, $6,530.99 out of the total passive are from dividends and long-term capital gains, which are taxed at a maximum rate of 15%. on On the other hand, the short-term gains, mostly from bank interests, will be taxed at our ordinary income rate. Those tens of thousands of dollars of 0% balance transfers I took were sweet. Now it's time to pay some back.

Among all my taxable investments, the only fund that didn't distribute anything in 2006 is BUFSX.

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