The new tax plan has almost everyone on Wall Street giddy, with reason: It's largely a tax cut on investing. But mutual fund companies and their tens of millions of shareholders are excluded from the party.

Certain provisions of the tax cut don't jibe well with the traditional mutual fund structure, and could make some types of mutual funds go the way of the dinosaur. For fund investors, investing just got a whole lot more complicated.

Historically, stock dividends were taxed like bond payments, meaning they were taxed like ordinary income. Whether you received $100 in dividends from owning General Motors ( GM) common stock or $100 in coupon payments from owning bonds or even $100 in salary as a GM employee, you owed income tax on $100. Stock dividends will now be taxed at 15% for most investors, more akin to how long-term capital gains are taxed. While it's not the completely tax-exempt status the president wanted for dividends, this is a sharp drop in rates. The top long-term capital gains tax rate also was lowered to 15%.

For those who receive dividends directly, the cut is a windfall. For those who own stocks indirectly through their mutual funds, the benefits are meager at best and a penalty at worst.

Why Funds Lose Out

Mutual funds incur expenses in the form of management fees, distribution charges and operating expenses from administrators, custodians, lawyers and accountants. For your typical fund, these fees add up to 1.4% per year. Mutual fund companies deduct these fees from the fund, but they charge them against any income the fund may receive from the stocks and bonds in the portfolio first. This makes perfect sense: Why take fees out of the fund's capital only to pass on a taxable dividend to the investor? If fees must be paid, then pay them in the most tax-favorable way.

The stock market as a whole has a dividend yield of only 1.6% a year at current prices. This leaves very little in dividends for the shareholders in your typical stock fund; all those dividends collected by the fund on your behalf were never taxed as income in the first place -- they largely went to pay fund fees. The dividend tax cut falls on deaf ears.

This tax cut rewards investors who own stock directly. Even investors who pay for advice directly by paying advisers' fixed fees each year can deduct their advisory fees from their ordinary income and collect low-tax dividends from their stocks, while mutual fund investors must pay their management fees out of low-tax dividends.

Even worse for the hapless fund investor, what little stock dividend they receive may be taxed as ordinary income in the future if they own a stock fund in a tax-deferred account such as most IRAs and 401(k)s. Any money withdrawn at retirement from such a plan is generally taxed as ordinary income -- even stock dividends that accumulate along the way that could have been taxed at a lower rate had they been received in a taxable account. Before the tax cut there was no 401(k) penalty, as the meager post-fund-fees dividend would have been taxed as ordinary income. Effectively, the 401(k) converts a low-tax dividend into higher-tax ordinary income.

Where to Put Your Money

This creates new complexities in where to allocate investments. You would now want to consider placing funds with higher stock dividend payouts, such as low-fee index and utilities funds, in a taxable account to avoid converting stock dividends into ordinary income. An investor would want to place funds that kick off large amounts of ordinary income -- funds that invest in REITs, bonds, convertible bonds or preferred stock, or funds that have high turnover -- into tax-deferred accounts. This is easier said than done because funds can own many different types of securities, investments that now have different tax treatments.

Back in the days when all income was income, things were simple. Your typical real estate fund owns REITs, which distribute high income that will still be taxed as ordinary income under the new plan, but also own real estate-related companies like homebuilders that could spit off low-tax dividends. Where should such a fund go?

By treating income from bonds and income from stocks differently, another popular type of fund becomes a bigger tax mess than Willie Nelson. A balanced fund invests in stocks and bonds. It was designed for investors who don't want to own separate stock and bond funds, a complete portfolio solution that rebalances for you. Balanced funds typically distribute income from both stocks and bonds. Some of that distribution will be at the ordinary income rate, the rest at the lower dividend rate.

Deciding where to place a balanced fund in your portfolio is now more complex than just owning separate bond and stock funds. The same problem would apply to a fund of funds, or funds that own other mutual funds, usually a blend of bond and stock funds. Most 401(k)s have balanced or fund of fund choices.

Even worse, many fund managers will likely not follow the rules required to achieve these new lower tax rates. For a stock dividend to be tax deductible, the investor has to own the stock for 60 days during a 120-day time period starting 60 days before the ex-dividend date. To realize the new lower 15% long-term capital gains tax rate, an investor still needs to hold a security for one year.

Fund managers, however, aren't rated by after-tax performance. Investors, the press and fund analysts primarily judge funds by their total returns. The fund manager is going to do whatever it takes to achieve the highest total return first and worry about tax inefficiency second -- hey, they don't pay the tax, shareholders do. If that means selling a stock that is up after only 10 months, or dumping a stock after a dividend was paid but not after the proper amount of days, so be it. The new tax law assumes investors are making their own decisions about stock buying and selling and will follow these complex rules, but for millions of fund investors this is not the case.

A Better Fix

Dividends shouldn't be taxed twice; companies shouldn't get penalized for paying out dividends to shareholders. The correct way to fix this glaring problem is to let corporations deduct dividend payouts from their taxable income. This deduction would boost after-tax earnings at corporations, providing an even broader stimulus to stocks as it would lower P/E ratios.

Such a deduction would also benefit all investors equally regardless of how they owned stock, directly or indirectly through mutual funds. As companies saved money they could spend more and cut back less, which helps employment and stimulates supply. Our current tax break puts more money into individuals' pockets, which stimulates demand.

Government handouts also stimulate demand, but generally make for bad policy. A corporate dividend deduction would be more costly for the government and would influence fewer votes -- direct handouts to the voters work better for re-election than indirect benefits to the economy and tax breaks to corporate America.

Instead of a dividend deduction, we have a tax plan that adds more complexity to an already confusing tax code, one designed by politicians, not by investors, and one that puts mutual funds and their investors at a disadvantage.

Jonas Max Ferris is a founder of MAXfunds.com , a fund research and analysis company, and partner in an investment advisor. He welcomes comments at jferris@maxfunds.com .