Is Tax Relief Coming ... for Fund Investors?

In 2002, for instance, $9.9 billion, or 10.3% of all fund distributions, were in long-term capital gains. Short-term gains made up less than half that amount -- $4.1 billion, or 4.3% of all fund distributions. (The remaining 85.4% of distributions were income or dividend distributions.)

But capital gains distributions overall have diminished -- another thing many of you know all too well. But that could mean that the timing is right for such a measure, says Tom Roseen, a Lipper research analyst. "There aren't as many capital gains generated now, so it would be relatively painless for the government," he says. "But as the market advances, the government will begin to get their tax revenue; it'll just be later, although in larger increments."

Roughly half of the $5.96 trillion invested in mutual funds are owned by investors who, on average, give up 1.5 percentage points to 1.8 percentage points every year in taxes, according to a new study by Lipper. As a result, taxable shareholders are losing up to 25% of their returns because of taxes.

Again, this bill won't eliminate the tax on long-term capital gains, but it would delay the pain. "We noticed two things in the tax study -- first, if the tax were deferred, most investors are better off," Roseen says. "But there's also a quasi-disadvantage for fund investors under the current tax law, since they don't have control over the portfolio. They could be buy-and-hold investors, but they're still taxed every year because of decisions the portfolio manager is making."

The Ryan bill is similar to another bill submitted by New Jersey Republican Jim Saxton in January. Saxton's bill limits the deferral to the tax on $6,000 in gains for married couples, $3,000 for other filers.