Carefully keep track of your investment records to help lower your tax bill. By Kimberly Lankford, Contributing Editor June 1, 2011 I'm organizing my tax records after filing my 2010 return. In How Long to Keep Tax Records, you recommended holding on to year-end mutual fund statements that show reinvested dividends so that you don’t end up paying taxes on the same money twice. Can you elaborate please? Sure. We believe that many taxpayers get tripped up on this issue (see The Most-Overlooked Tax Deductions). The key is to keep track of the tax basis of your mutual fund investment. It starts with what you pay for the original shares . . . and it grows with each subsequent investment and each time dividends are reinvested in additional shares. Let’s say you buy $1,000 worth of shares, and each year for three years you reinvest $100 in dividends. Then you sell your entire position for $1,500. At tax time, you’ll be asked to subtract your tax basis from the $1,500 in proceeds to figure your taxable gain. If you simply report the original $1,000 investment, you’ll be taxed on a gain of $500. But your real basis is $1,300. You get credit for the $300 in reinvested dividends because you paid tax on each year’s payout, even though the money was automatically reinvested. Failing to include the dividends in your basis would mean paying tax on that $300 twice. Many funds now track an average tax basis for investors, but maintaining careful records yourself can give you more flexibility. If you sell only a portion of your holding in a fund, choosing the shares with the highest basis, for example, would produce the lowest tax bill. Starting with fund shares purchased in 2012, mutual funds will be required to track each investor’s tax basis and report it to both the investor and the IRS when shares are redeemed. Got a question? Ask Kim at firstname.lastname@example.org.