USA Tax question: American Expat beginning investor

December 9, 2011 7:20 AM

How do taxes work on investments in mutual funds? I am a novice at investing. American citizen working overseas and building a portfolio finally. I've established my emergency savings and am heading into taxable investments. Unfortunately, I am unable to contribute to my Roth IRA or contribute to a traditional IRA while claiming FEIE (Foreign Earned Income Exemption) with the IRS. I'm looking into investing in Vanguard's VWINX fund. How would US taxes work on these investments?
posted by thatgirl1985 to work & money (4 answers total)

There will be dividend income, and capital gains. Since its in an index fund you shouldn't have much in short term cap gains. The long-term cap gains will come when you sell mostly (assuming you hold it for more than a year). In January you'll get a form from Vanguard that tells you what the ordinary divvy's were (taxed at your marginal rate), your qualified divvy's (taxed at 15%) and the cap gains distribution. You fill out schedule D and the qualified dividend work sheet in your 1040 instruction book.

Or you just give them to your accountant - which if you are an expat you should probably be using because the tax code is even more confusing.
posted by JPD at 7:29 AM on December 9, 2011

I like to buy ETFs, because they are taxed only when you sell. It's not a huge financial difference, but it means most years I don't have to do any of the investment related tax paperwork. Not that it's that hard -- TurboTax does it automatically.

The one thing I didn't realize when I first started investing is that my state taxes capital gains as income, even though the Federal government doesn't. And I was too cheap to pay for state TurboTax. This resulted in getting a very nasty letter from my state government and I had to pay back taxes with interest (no penalty though). So double check how your state deals with investment income.
posted by miyabo at 7:42 AM on December 9, 2011

I like to buy ETFs, because they are taxed only when you sell

This is not always true, ETFs tend not to distribute capital gains as much as mutual funds because of the way they are structured, but it can still happen, especially for ETFs that track a very narrow market or have exotic assets.
posted by burnmp3s at 9:21 AM on December 9, 2011

Thank you for the information, everyone. Now I am not clueless ; )
posted by thatgirl1985 at 1:59 AM on December 10, 2011