Nobody wants to pay any more in tax than they have to. But toward the end of the year, a big tax trap looms for unsuspecting investors, and if you don't use one simple strategy to avoid it, it can cost you a huge amount in additional tax.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, discusses the tax trap that mutual fund distributions bring to taxpayers at year-end. Dan notes that because funds are required to distribute their income and capital gains, they can catch unsuspecting fund shareholders by surprise. Especially after long bull markets, funds are more likely to make big taxable distributions.

Dan discusses a recent Morningstar finding that T. Rowe Price , Janus Capital , and BlackRock  could have several funds with large distributions, because of recent changes in fund management or strategy that required big changes to their portfolios. He concludes with the easy solution that fund investors can use to avoid getting in tax trouble with such funds.


Be smart about your taxes
Avoiding tax traps is just one way you can help reduce your bill to Uncle Sam. In our brand-new special report "How You Can Fight Back Against Higher Taxes," The Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.

The article Taxes 2014: The Massive Tax Trap You Must Avoid originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends BlackRock. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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