Taxes due from 2018?  A number of clients have asked me a similar question… here is my response. I hope it helps.

Hi (name hidden of course) –

I hope you are both well.

Yes, as it relates to taxable gains/distributions on your 1099, this is an unusual year.  But it will likely happen again sometime down the road.

Portfolios were down last year….  

Yet, even in down years, companies often distribute their profits via dividends – current yearly dividends on your taxable portfolio (your IRAs/401(k)s are not taxable at this point) is about 2.3% per year. So we will likely see dividends every year on line 1a of your 1099, with a portion being Qualified Dividends (preferred) in line 1b.

Add in that mutual funds (index, active and factor) adjust portfolios based on their investment management style and while your investments seek to be tax efficient (and have low turnover) some adjustments take place each year within them and, according to the law, they must distribute most of gains they realize (in the form of capital gains distributions on line 2a of your 1099) to shareholders.

That said, when they distribute capital gains, your cost basis in your account will rise so the amount of gains you will owe taxes on in the future is reduced – for example –  your overall cost basis went up $1,763.23 (this matches the capital gain you received and will be taxed on) this year to $196,710.85 in the reference account.

The net effect is that gains/taxes are often distributed over the years that you invest, not concentrated in one year when you sell an investment – though generally speaking, gains distributed on a yearly basis should be smaller (not so with all funds) and a lot of unrealized gains (you’ll eventually pay taxes on these in the future) will likely (and hopefully will – we like gains, no?) build up in your portfolios over time.

Further – in some years we may have losses we can “harvest” to offset expected capital gains.

I hope that was clear. Hard to make it simple but hopefully clear.

Call me at any time if you want to talk it through or feel free to access my calendar below and pick a time to connect at your convenience.

Thank you,


You can learn more about this and other retirement planning terms by reading my Retirement Planning Terms Explained post here.