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Tax considerations can change as your circumstances and market conditions change. Here are some ideas on how to lower your taxes when you buy and sell shares in a mutual fund.

Buying
Before you buy mutual fund shares, ask about the realized gains in its portfolio. If they're more than 5% of net asset value (NAV) and the record date of the next capital gains distribution is near, you may want to delay your purchase until after the record date. Otherwise you'll "buy the dividend," and that can cost you money in taxes. Here's how it works.

Say you invest $5,000 on December 15 (record date), buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have $5,000 in value (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received -- even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest -- but keep it in perspective.

This rule of thumb primarily applies to large one-time, lump-sum investments. If you make regular investments every month, don't let the record date derail your program. It's better to buy the dividend than fail to invest.

Selling
At some point, you may redeem shares from your taxable accounts and owe capital gains tax on the profits.

When that happens, you can lower the net capital gains subject to tax by selling shares from a fund that has lost value at the same time you sell shares in a fund that has gained value. This will allow you to offset the realized capital gains in the first fund with losses in the second. You can also use this strategy to offset capital gain distributions. A common mistake is to sell or exchange shares simply to avoid receiving a distribution. For example, say you buy 1,000 shares of a fund that costs $10 per share. Two years later, when the shares are worth $12 each, the fund announces it will distribute a $1 long-term capital gain for each share. You can stay in the fund and pay taxes on $1,000 in capital gains distributions, or redeem your fund shares and pay taxes on a long-term capital gain of $2,000.

As the table below shows, it may make sense to hold the investment and pay taxes on the fund's distribution instead of selling your shares and paying taxes on your capital gain.

Make sure you don't pay taxes twice. Be sure to include income and capital gains distributions you've reinvested in a fund when determining the cost basis of the shares you're selling. Calculating your cost basis is one of the more complex aspects of tax reporting for your mutual fund investments -- especially when you've bought shares of your fund at different times.