Publication 564 |
2000 Tax Year |
Tax Treatment of Distributions
A distribution you receive from a mutual fund may be an ordinary
dividend, a capital gain distribution, an exempt-interest dividend, or
a nontaxable return of capital. The fund will send you a Form
1099-DIV or similar statement telling you the kind of
distribution you received. This section discusses the tax treatment of
each kind of distribution, describes how to treat reinvested
distributions, and explains how to report distributions on your
return.
You may be treated as having received a distribution of capital
gains even if the fund does not distribute them to you. See
Undistributed capital gains under Capital Gain
Distributions.
Community property states.
If you are married and receive a distribution that is community
income, one-half of the distribution is generally considered to be
received by each spouse. If you file separate returns, you must each
report one-half of any taxable distribution. Get Publication 555,
Community Property, for more information on community
income.
If the distribution is not considered community income under state
law and you and your spouse file separate returns, each of you must
report your separate taxable distributions.
Share certificate in two or more names.
If two or more persons, such as you and your spouse, hold shares as
joint tenants, tenants by the entirety, or tenants in common,
distributions on those shares are considered received by each of you
to the extent provided by local law.
Certain year-end dividends received in January.
Dividends declared and made payable by mutual funds in October,
November, or December are considered received by shareholders on
December 31 of the same year even if the dividends are actually paid
during January of the following year.
Tax-exempt mutual fund.
Distributions from a tax-exempt mutual fund (one that invests
primarily in tax-exempt securities) may consist of ordinary dividends,
capital gain distributions, undistributed capital gains, or return of
capital like any other mutual fund. These distributions generally are
treated the same as distributions from a regular mutual fund.
Distributions designated as exempt-interest dividends are not
taxable. (See Exempt-Interest Dividends, later.)
Reporting Mutual Fund Distributions on Form 1040 and Form 1040A
Ordinary Dividends
An ordinary dividend is a
distribution by a mutual fund out of its earnings and profits. Include
ordinary dividends that you receive from a mutual fund as dividend
income on your individual income tax return.
Ordinary dividends are the most common type of dividends. They will
be reported in box 1 of the Form 1099-DIV or on a similar
statement you receive from the mutual fund.
Capital Gain Distributions
These distributions are paid by mutual funds from their net
realized long-term capital gains. The Form 1099-DIV (box 2a) or
the fund's statement will tell you the amount you are to report as a
capital gain distribution. Capital gain distributions are taxed as
long-term capital gains regardless of how long you have owned the
shares in the mutual fund.
Undistributed capital gains.
Mutual funds may keep some of their long-term capital gains and pay
taxes on those undistributed amounts. You must report your share of
these amounts as long-term capital gains, even though you did not
actually receive a distribution. You can take a credit for any tax
paid because you are considered to have paid it.
Form 2439.
The fund will send you Form 2439, showing your share of the
undistributed capital gains in box 1a and any tax paid by the mutual
fund in box 2. The undistributed capital gain is not reported on Form
1099-DIV.
Attach Copy B of Form 2439 to your return. Keep Copy C for your
records.
Increase to basis.
When you report undistributed capital gains from a mutual fund, you
must increase your basis in the shares. See Adjusted Basis,
later.
Exempt-Interest Dividends
A mutual fund may pay exempt-interest dividends to its shareholders
if it meets certain requirements. These dividends are paid from
tax-exempt interest earned by the fund. Since the exempt-interest
dividends keep their tax-exempt character, do not include them in
income. However, you may need to report them on your return. See
Information reporting requirement, next. The mutual fund
will send you a statement within 60 days after the close of its tax
year showing your exempt-interest dividends. Exempt-interest dividends
are not shown on Form 1099-DIV.
Information reporting requirement.
Although exempt-interest dividends are not taxable, you must report
them on your tax return if you are required to file. This is an
information reporting requirement and does not convert
tax-exempt interest to taxable interest. Also, this income is
generally a "tax preference item" and may be subject to the
alternative minimum tax. If you receive exempt-interest dividends, you
should get Form 6251, Alternative Minimum Tax-- Individuals,
for more information.
Return of Capital
(Nontaxable) Distributions
A distribution that is not out of earnings and profits is a return
of your investment, or capital, in the mutual fund and is shown in box
3 of Form 1099-DIV. These return of capital distributions are
generally not taxed and are sometimes called tax-free dividends or
nontaxable distributions.
A return of capital distribution reduces your basis in the shares.
Basis is explained under Keeping Track of Your Basis,
later. Your basis cannot be reduced below zero. If your basis is zero,
you must report the return of capital distribution on your tax return
as a capital gain. Report this capital gain on Schedule D (Form 1040).
Whether it is a long-term or short-term capital gain depends on how
long you held the shares.
Example.
You bought shares in a mutual fund in 1996 for $12 a share. In
1997, you received a return of capital distribution of $5 a share. You
reduced your basis in each share by $5 to an adjusted basis of $7. In
1998, you received a return of capital distribution of $1 per share
and further reduced your basis in each share to $6. In 1999, you
received a return of capital distribution of $2 per share. Your basis
was reduced to $4. In 2000, the return of capital distribution from
the mutual fund was $5 a share. You reduce your basis in each share to
zero and report the excess ($1 per share) as a long-term capital gain
on Schedule D.
Reinvestment
of Distributions
Most mutual funds permit shareholders to automatically reinvest
distributions in more shares in the fund, instead of receiving cash.
You must report the reinvested amounts the same way as you would
report them if you received them in cash. This means that reinvested
ordinary dividends and capital gain distributions generally must be
reported as income. Reinvested exempt-interest dividends generally are
not reported as income. Reinvested return of capital distributions are
reported as explained under Return of Capital (Nontaxable)
Distributions, earlier. See Keeping Track of Your Basis,
later, to determine the basis of the additional shares.
How To Report
You must report
mutual fund distributions on Form 1040 or Form 1040A. You cannot
report mutual fund distributions on Form 1040EZ.
You cannot use Form 1040A and must use Form
1040 in either of the following situations.
- You received a return of capital distribution that must be
reported as a capital gain because it is more than your basis in your
mutual fund shares.
- You must report an undistributed capital gain.
Form 1040A.
If you file Form 1040A, report your ordinary dividend distributions
on line 9 and your exempt-interest dividends on line 8b. If the total
of the ordinary dividends you received is more than $400 or you
received ordinary dividends as a nominee, first report the ordinary
dividends in Part II of Schedule 1, on line 5. Report the total from
line 6 of that schedule on line 9 of Form 1040A. Attach Schedule 1 to
your return.
Capital gain distributions.
If you received capital gain distributions, you may have to file
Form 1040. But you can report capital gain distributions on line 10 of
Form 1040A, instead of on Form 1040, if both of the following are
true.
- None of the Forms 1099-DIV (or substitute statements)
you received have an amount in box 2b, 2c, or 2d.
- You do not have to file Form 1040 for any other reason. (For
example, you must not have any other capital gains or any capital
losses.)
Form 1040.
If you file Form 1040, report your ordinary dividend distributions
on line 9 and your exempt-interest dividends on line 8b. If the total
of the ordinary dividends you received is more than $400 or you
received ordinary dividends as a nominee, first report the ordinary
dividends in Part II of Schedule B, on line 5. Report the total from
line 6 of that schedule on line 9 of Form 1040. Attach Schedule B to
your return.
Do not include capital gain distributions as dividend income on
Form 1040 or Schedule B.
Capital gain distributions.
If you received capital gain distributions, you report them either
directly on Form 1040, line 13, or on Schedule D, line 13, depending
on your situation. Report them on Schedule D, line 13, unless all of
the following are true.
- The only amounts you would have to report on Schedule D are
capital gain distributions from box 2a of Form 1099-DIV (or
similar statement).
- You do not have an amount in box 2b, 2c, or 2d of any Form
1099-DIV (or similar statement).
- You are not filing Form 4952 or, if you are, the amount on
line 4e of that form is not more than zero.
If all of the above statements are true, report your capital
gain distributions directly on line 13 of Form 1040 and check the box
on that line. Also use the Capital Gain Tax Worksheet in
the Form 1040 instructions to figure your tax.
Undistributed capital gains.
To report undistributed capital gains, you must complete Schedule D
and attach it to your return. Report these gains on Schedule D, line
11, and attach Copy B of Form 2439 to your return. Report the tax paid
by the mutual fund on these gains on Form 1040, line 64, and check box
a on that line.
Tables 1A and 1B.
See Tables 1A and 1B for more information on
where to report your mutual fund distributions on Form 1040 or Form
1040A.
Nominees.
If you received a Form 1099-DIV or Form 2439 as a nominee
(that is, it includes amounts that actually belong to someone else,
other than your spouse), you must file a Form 1099-DIV or Form
2439 with the Internal Revenue Service and give the actual owner a
copy. See the instructions for Forms 1099 or Form 2439 for details.
If you received an ordinary dividend distribution as a nominee,
report it on line 5 of Schedule B (Form 1040) or Schedule 1 (Form
1040A). Under your last entry on line 5, put a subtotal of all
ordinary dividends listed. Below this subtotal, enter "Nominee
Distribution" and show the total ordinary dividends you received as
a nominee. Subtract this amount from the subtotal and enter the result
on line 6.
If you received a capital gain distribution or were allocated an
undistributed capital gain as a nominee, report only the amount that
belongs to you on line 10 of Form 1040A, line 13 of Form 1040, or
Schedule D (Form 1040), whichever is appropriate. Attach a statement
to your return showing the full amount you received or were allocated
and the amount you received or were allocated as a nominee.
Foreign tax deduction or credit.
Some mutual funds invest in foreign securities or other
instruments. Your mutual fund may choose to allow you to claim a
deduction or credit for the taxes it paid to a foreign country or U.S.
possession. The fund will notify you if this applies to you. The
notice will include your share of the foreign taxes paid to each
country or possession and the part of the dividend derived from
sources in each country or possession.
You may be able to claim a credit for income tax paid to a foreign
country. However, it may be to your benefit to treat the tax as an
itemized deduction on Schedule A (Form 1040). For more information on
claiming a foreign tax deduction or credit, get Publication 514,
Foreign Tax Credit for Individuals.
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