(MONEY Magazine) – In most ways, mutual funds make investing a whole lot easier. The one glaring exception: Each year, when a mutual fund distributes its capital gains, shareholders whose accounts are not tax deferred have to pay the Internal Revenue Service its due--even though they haven't sold their fund shares. It's not unheard of for investors to see a fund go into the red, yet still owe taxes just because the fund manager sold some holdings at profit.

But if Rep. Jim Saxton (R-N.J.) has his way, taxes on mutual fund distributions may soon be history. Saxton's bill, currently before the House Ways and Means Committee, would allow investors to receive up to $3,000 in capital-gains distributions per year without owing tax ($6,000 if married and filing jointly), provided that the gains are reinvested in the fund. This doesn't eliminate the capital-gains tax--you'd still owe after you sold shares, just the way investors do when they sell individual stocks.

--PAT REGNIER