SILVERTONAPPEAL.COM
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WEDNESDAY, APRIL 20, 2022
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Windfalls take breath away at tax time
Stocks, Bitcoin carry
unwelcome surprise
Susan Tompor
Columnist
USA TODAY
A clever little term is being bantered
about on social media this tax season to
describe how tax preparers might break
the bad news to clients: Congratudo-
lences.
It’s a word you might offer, according
to the Urban Dictionary, to a co-worker
who has accepted a job promotion that
is a mixed blessing. Maybe something
that moves her up the ranks but puts her
in more direct contact with a cantanker-
ous colleague.
“I think I’m going to use it with clients
that have to pay a big tax bill because
they made a lot of money,” enrolled
agent Matthew Cordes said in a light-
hearted tweet.
Big tax headache from big gains
Investors and others who saw finan-
cial success in 2021 are seeing eye-pop-
ping numbers for taxable income, often
triggering tax bills many never imag-
ined.
Blame Bitcoin and other virtual cur-
rencies. Blame lots of trading in stocks.
And yes, blame mutual funds that paid
out some extraordinary capital gains
distributions after a robust rally on Wall
Street last year.
The S&P 500 rose nearly 26.9% in
2021. The Dow Jones Industrial Average
climbed 18.73% in 2021. And your tax
bill?
Big gains can mean big money at tax
time.
James O’Rilley told me of one inves-
tor who made well over a million dollars
buying and selling virtual currency al-
most daily last year.
The man – a friend of a friend who
wasn’t aware of all the tax ramifications
– ended up being shocked by the out-
come, according to O’Rilley, a CPA and
tax director for Doeren Mayhew in Troy,
Michigan.
He had taken early retirement – or so
he thought, O’Rilley said – but then
owed more than $400,000 in federal
taxes for 2021 on his virtual currency
gains.
The gain of more than $1 million last
year amounted to short-term profits
that are taxed at regular income tax
rates. In this case, the money was taxed
at the top rate of 37% plus a “net invest-
ment income tax” of 3.8%.
“The problem is the value of the port-
folio dropped substantially in 2022, to a
level where he needs to sell the entire
portfolio just to pay the taxes,” O’Rilley
said.
One small plus side to this story: The
investor lives in Florida, which does not
have a state income tax. More money
would have been owed on the state level
if the man who bet on Bitcoin lived in a
state with an income tax.
Investors and others who saw financial success in 2021 are seeing eye-popping numbers for taxable income, often
triggering tax bills many never imagined. SETH WENIG/AP
borrow money to cover the taxes due.
Cordes, who prepares about 650 in-
dividual tax returns a year, told about
one elderly client who normally would
have to report about $5,000 to $8,000 in
taxable capital gains distributions from
mutual funds held outside of tax-de-
ferred retirement accounts.
This year, the client had to report
$55,000 in taxable capital gains distri-
butions.
“His tax due this April 18 is over
$11,000.”
Cordes has heard of clients else-
where facing even bigger tax bills due to
massive capital gains distributions.
These “surprise” tax bills involve cap-
ital gains distributions from mutual
funds held outside of a traditional
401(k) or tax-deferred IRA.
“Most taxpayers do not realize that
mutual funds must distribute the cap-
ital gains that are realized within the
fund,” Cordes said.
“Those capital gains are then rein-
vested and the taxpayer does not ‘re-
ceive’ anything in the form of a cash
payout,” he said.
What you’d get is a 1099-DIV to re-
port those capital gains distributions
from mutual funds. Typically, those are
sent out in late January.
Good rally shares
some of the blame
The strong rebound in the stock mar-
ket in the second half of 2020 after the
meltdown at the start of the pandemic
plus sizable gains last year resulted in
larger distributions than normal, ac-
cording to Fidelity Investments.
In such extended periods of broad
growth, fund managers are less likely to
have losses to offset gains.
About 53% of the mutual funds
based in the United States, including ex-
change-traded funds, reported capital
gains distributions for 2021. That was
up from 43.1% in 2020, according to Chi-
cago-based Morningstar Direct, a re-
search firm.
Morningstar noted that 5,405 mutual
funds reported capital gains in 2021,
compared with 4,234 in 2020.
How many funds pay out such distri-
butions vary year to year. Based on Mor-
ningstar Direct data going back to 1990,
spikes where 60% or so of mutual funds
had capital gains distributions, were
relatively rare and took place in 1993,
1997, 1998, and 2007.
During that time, we saw four years –
2002 and 2003, as well as 2009 and
2010 – when only 25% or fewer funds
had such distributions.
Mutual fund investors get
clobbered by unusual capital gains
One didn’t need to be a day trader,
though, to face tax headaches. Even
passive investors saw incredible tax
troubles.
One reader told me that he has been
investing money in mutual funds for
about 30 years and doesn’t remember
anything like this happening.
For 2021, his capital gains distribu-
tions from his mutual funds outside of
tax-deferred retirement accounts in-
creased by a shocking $82,000 in 2021
from 2020.
And as a result, the couple reported
$115,000 in capital gains distributions
on their 2021 return.
The retired couple who live in the
Traverse City area in northern Michigan
saw their federal and state of Michigan
tax burden go up by $20,000 this tax
season.
Fortunately, the couple – who asked
not to be named because they didn’t
want others to read about their finances
– was able to pay and did not have to
Public Notices
Five-figure income gains
The dollar amount of the distribu-
tions, though, can shock investors who
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NOTICE OF BUDGET COMMITTEE
MEETING
A public meeting of the Budget Com-
mittee of the Silver Falls School
District, Marion and Clackamas Coun-
ties, State of Oregon, to discuss the
budget for the fiscal year July 1, 2022 to
June 30, 2023, will be held at Silverton
High School’s library; 1456 Pine Street,
Silverton, Oregon. There will also be a
virtual option to join via Zoom. The
link can be found at https://meetings.bo
ardbook.org/Public/Organization/1569.
The meeting will take place on April 28,
2022, at 7:00 PM. The purpose of the
meeting is to receive the budget mes-
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meeting where deliberation of the
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Silverton Appeal
April 13, 20, 2022
have been saving a great deal in mutual
funds for decades.
Some funds distributed 10% to 20%
or more of their net asset value – which
can add four or five figures of income to
an investor’s 1040 this tax season.
Take this easy math example. If you
had $10,000 in a mutual fund outside of
a retirement account, you’d have an ex-
tra $1,000 in taxable capital gains in-
come when a fund has a 10% capital
gains distribution.
Many investors over the years have
built up quite a bit of savings in taxable
mutual funds held outside of retirement
accounts. In those cases, you’re looking
at taxable income when a mutual fund
has a capital gains distribution.
For many retirement savers with
401(k)s and IRAs, it’s a non-event if the
mutual fund is in a tax-sheltered ac-
count. You’re getting hit with taxes
when you begin withdrawing money
from traditional retirement accounts.
Qualified withdrawals from Roth IRAs
are not taxable.
Capital gains distributions can be
characterized as short-term or long-
term based on the investment strategies
of the mutual fund.
For the taxpayer, a short-term distri-
bution would be taxed at the individ-
ual’s ordinary income tax rate. There are
seven income tax rates in place current-
ly 10%, 12%, 22%, 24%, 32%, 35% and
the highest at 37%.
In general, the more active a fund
manager is with trading, the more likely
the fund would distribute short-term
gains. As a result, investors may find it
more advantageous to hold funds with a
higher turnover rate in tax-shelters ac-
counts, such as traditional IRAs and
Roth IRAs, according to Fidelity.
Taxpayers receive a break on long-
term distributions. The long-term cap-
ital gains tax rates are 0%, 15% and 20%,
depending on your income.
Mutual fund companies began pub-
lishing estimates last November of the
capital gains distributions that were
likely to be made in mid-December. But
funds may pay distributions throughout
a year.
These “off-cycle” distributions may
be the result of a fund merger or invest-
ment mandate change, according to Fi-
delity.
Growth funds again made significant
distributions, but in 2021 value strate-
gies gained popularity and made some
make some big distributions, according
to Morningstar experts Christopher
Franz and Anthony Thorn.
Morningstar experts noted that it’s
not all pain, as reinvested capital gains
distributions will increase your cost ba-
sis and ultimately could reduce the cap-
ital gains taxes you owe when you even-
tually sell the fund.
Obituaries
Jodi (Lamb) Miller-Pfaff
SILVERTON - Jodi Miller-Pfaff passed away on April 9, 2022, in her Silver-
ton, Oregon home after a three-year battle with pancreatic cancer. Jodi was
born in Salem, Oregon on September 25, 1947. She grew up in Indepen-
dence, Oregon and graduated from Central High School. She married Neil
Everett Miller in 1966 and was married for 27 years until he passed away.
They raised their two children Beth and Scott in the Milwaukie/Gladstone
area. Jodi was a wonderful wife and mother who was at every game, concert
and play cheering her children on.
Jodi was a hard worker. She wanted to make a better life for her family
and usually had at least two jobs. She worked as a telephone operator, ran
the front of a busy florist in Portland, managed a Hallmark card store, and
then worked in the dental and medical fields as an office manager. She also
sold Tupperware and was a favorite Avon lady for several years in the 1980s.
She loved to visit her customers to chat and catch up on the latest gossip.
Everyone loved her at every job she had. She always had a smile on her face.
Jodi always kept a beautiful home. She had great taste and people always
raved over her house and the way it was decorated. She loved antiques and
was a collector of many things including Golden Books, stamps, flower
frogs and vintage Santas. She was an avid reader, she read at least a novel
a week and loved her home decorating magazines. She also volunteered at
the local grade school to read with the children. She loved to tend to her
yard and flower garden. Her yard has always been one of the best in the
neighborhood. She had beautiful flowers and trees and had enjoyed growing
vegetables in her Silverton backyard. She said she got her green thumb from
her beloved Grandma Edie. She loved music, concerts, antiquing, and the
occasional bingo night with friends.
Jodi reunited with an old classmate, Norm Pfaff at a high school reunion
planning committee in 1995. They married and built their dream log home
in Bend, Oregon. They moved to Silverton in 2018 to downsize and enjoy
retirement. They enjoyed trips to Cabo, their cabin in Detroit Lake and their
place at Nye Beach near Newport. They also shared a Rick Steves dream
trip to Europe in 2017 visiting Germany, Switzerland, Italy, and her favorite,
Paris, France. She also went on a beautiful bucket list trip to Hawaii with
her daughter Beth last September. Jodi had many friends, old ones from
her life when her kids were young and many new friends that she made in
Silverton. She cherished her friends and was loved by so many. She loved
life and was her smart, sassy, vivacious self until the end. She will be missed
so much and remembered forever.
She is survived by her husband, Norm Pfaff and four children, Beth Weber,
Scott Miller, and his wife Zaira, Brian Pfaff and his wife Melissa and Cadi
Brown and her husband Daron. She had 12 grandchildren: Brian, Austin,
Lillian, Kendall, Francisco, Zaid, Alex, Chase, Charlotte, John, Zander, and
Heath.
A memorial will be held at Detroit Lake to celebrate her life this summer.
Donations to the Pancreatic Cancer Society can be made at pancan.org/
donate.