You may have seen the recent H&R Block commercials that try to illustrate how much money is left on the table when people do their own taxes. They show a man placing $500 in every seat in every football stadium in America, and stacks and stacks of dollars on an aircraft carrier that amount to a billion dollars.
A billion dollars is a lot of money.
But I don’t want to talk about a billion dollars. I want to talk about $48 billion dollars.
That’s how much investors paid in capital gains taxes in 2013.
Most investors are familiar with the idea that they’re taxed on what they earn: If you buy a stock and sell it at a higher price, the difference is usually subject to a capital gains tax. But what surprises a lot of people is that it’s possible to owe capital gains taxes even if you didn’t sell your fund at a gain during the year. Why? Mutual funds and ETFs also buy and sell securities during the year, and they can incur gains, too.
Funds are required to pass those gains on to you by December 31 every year, and those distributions are taxable.
All those taxes add up… to about $48 billion, assuming the highest federal tax bracket.*
$48 billion isn’t a lot of money—it’s a TON of money.
So what else could investors have bought instead? Here are a few ideas:
- WhatsApp—three times over.
- 82 billion rolls of toilet paper.
- 1.4 million BMWs.
- Twelve trips to Mars.
- 69 million Corgi puppies.
- Measles and rubella vaccines for every child in the world. (You’d have $45 billion leftover.)
- Time Warner Cable. The whole thing.
- 19 billion cans of SPAM.
- 91 million shares of Apple stock (10% of total shares outstanding).
- The White House—147 times over.
The point is: capital gains taxes matter. It pays to pay attention to taxes that come from your investments, because every dollar paid in taxes is a dollar less in your pocket.
This year, consider selecting funds that are managed for tax efficiency. Not all investments pay capital gains distributions and some funds—like ETFs—have a reputation for being tax-efficient.
Who knows—with a little tweaking of your portfolio, maybe this year you can buy what’s on your list.
* Sources: BlackRock and Morningstar, as of 12/31/13.