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Ex marks the spot

November 7, 2011

Beware of the ex-dividend date! No, it’s not some kind of evil creature from a childhood fairy tale, but the results on your tax bill might be pretty scary in their own right if you fail to exercise some basic–but unfortunately often overlooked–planning. The ex-dividend Date is relevant for anyone who is mulling the purchase of a mutual fund. With plenty of investors likely looking to take advantage of a market dip during these volatile times, that kind of reallocation can be a popular choice. But if you aren’t careful, you might wind up with a costly and unexpected tax bill if you are not careful. The ex-dividend date is defined by the IRS as “the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment”. That’s a backhand way of saying that the ex-dividend date is the official cutoff point where owners of record are both eligible for dividends on their holdings and liable for tax payments on those same holdings. The popular phrase is that you want to try and avoid “buying the tax liability”. What that means for new investors is that if you purchase shares in a fund before they pay these out, you might be saddled with a tax bill and see the value of your per-share investment reduced. If you buy 1,000 shares at $25/share…and the fund declares a distribution of $1.50/share, you will get more shares, sure, but you also might get a 1099 for $1,500 in the mail. Not an appealing trade-off. The ex-dividend date for many funds is toward the end of the year, so do your research and be smart about timing. When it comes to investing, Caveat Emptor–buyer beware–always applies.

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This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.

Andrew Wood, Dan Simon and Alison Slezak are Investment Advisor Representatives. Advisory services are offered through CoreCap Advisors, LLC., a Registered Investment Advisor. CoreCap Advisors, LLC and Daniel A. White & Associates, LLC are separate & unaffiliated entities. 

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