Successful investors are in for a holiday double-hitter this year of the unwelcome kind. Mutual funds are reporting capital gains distributions -- some up 6 to 60 percent  -- the highest levels since 2008. It's a welcome event. But taxes rise along with these gains, and federal tax this year is calculated at the new 20 percent rate, up from 15 percent last year. And, most investors don't even know what they owe yet.

Because mutual fund companies announce their gains or losses on different days, up until the last day of the year, posting estimated fund totals as they're calculated, investment clients may not know the final tally until January. Columbia Management Investment Advisers LLC, for example, still had some nine funds without estimations on December 17.

Among the individual funds with estimates, the possible increases were sizable. Columbia's Active Portfolios Multi-Manager Alternative Strategies Fund posted an estimated range in capital gains for the year of between 0.93 percent to 3.72 percent.

At times like these advisors, may be able to make clients happy again, if they've been steadily monitoring individual accounts. Advisors, like J. Michael Martin, CIO and owner of Columbia, Md.-based Financial Advantage, who says that unlike clients who rarely review their accounts more than quarterly, “We see the transactions every day” and can recommend mitigating action where necessary.

And advisors like Judith McGee, LHD, CFP, who says her “holistic financial navigation and wealth management services that focus on collaboration and strategizing” strive to limit capital gains impact across her whole client base “throughout the year.”

The firm does this, she says, “by running a screen with financial planning elements.” The screen includes such things as finding which clients have embedded or undeclared gains, says McGee, the CEO and chair of McGee Wealth Management, based in Portland, Ore. In addition to the screen, her firm may check with the client directly to see if there are “any carried forward losses we may not know about,” she says. “Where meaningful, we will pull a trade to register a capital loss, using our portfolio management and review process.”

Martin, who works out of Financial Advantage's Naples, Fla., office, also employs the process, known as tax loss harvesting, to lower tax obligations. He and the research director, along with their advisors, go through client portfolios, selling the shares that haven't done well so that clients can declare the loss to offset the gains, especially at this time when the latter are coming in high. “Clients count on us to do tax loss harvesting for them,” says Martin. “In determining tax loss usefulness, having a capital gains tax to offset is something that might push us over the edge to sell.” This can further beat up weak funds at the end of the year, he notes. “Gains definitely will influence loss harvesting this year.”

In addition to mutual fund distributions, investors this year have seen an unusual 25 percent gain among large-cap U.S. stocks. The long-term average return on these stocks, including dividends, was about half that. It's easy to see how a $2 million portfolio can quickly reach $100,000 in capital gains -- and a $20,000 tax bill for this year.  

Tax-limiting strategies influence trading decisions as well. Firms have had to keep large cash positions rather than invest now in a fund that may declare a gain after the client has only been invested a few weeks.
“If you do the wrong thing,” such as buying a fund at the wrong time, “it could easily create a taxable event that is unintended and unwanted,” adds McGee. “Among people who don't pay attention to detail, it can happen quite easily, if you're too eager to make the trade.”

On the flip side, being out of the market has its price, too. “It can mean going to cash and staying there until the third week of December,” says Martin. Money un-invested can't produce earnings, he acknowledges. “And, if you keep having losses to offset them, you'll never make any money either.”

“We all love to take a gain,” he observes. “But you can't pretend you'll never pay tax on it.”