Mutual Fund   Distributions

Taxmap/pubs/p564-000.htm#TXMP078adca7 Reminders

Taxmap/pubs/p564-000.htm#TXMP478e32f8
Reporting dividends on your return.

If you file Form 1040A, you must attach Schedule 1 to your return if your ordinary dividend income is more than $1,500; if you file Form 1040, you must attach Schedule B to your return if your ordinary dividend income is more than $1,500.

Taxmap/pubs/p564-000.htm#TXMP28e5e9aa
Photographs of missing children.

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843- 5678) if you recognize a child.

Introduction

This publication provides federal income tax information for individual shareholders of mutual funds, including money market funds. It explains how to report distributions paid to you by a mutual fund and any expenses connected with your investment. In addition, it explains how to report undistributed long-term capital gains. It also explains how to figure and report your gain or loss when you sell, exchange, or redeem your mutual fund shares. A comprehensive example, with filled-in forms, appears at the end of the publication.

Taxmap/pubs/p564-000.htm#TXMP267f8036 Mutual fund.

A mutual fund is a regulated investment company generally created by "pooling" funds of investors to allow them to take advantage of a diversity of investments and professional management.

Taxmap/pubs/p564-000.htm#TXMP5d182239 Money market fund.

A money market fund is a mutual fund that tries to increase current income available to shareholders by buying short-term market investments.

Money market funds pay dividends and should not be confused with bank money market accounts that pay interest.

Taxmap/pubs/p564-000.htm#TXMP0972037d Qualified retirement plans and IRAs.

The rules in this publication do not apply to mutual fund shares held in individual retirement arrangements (IRAs), section 401(k) plans, and other qualified retirement plans. The value of the mutual fund shares and earnings allocated to you are included in your retirement plan assets and stay tax free generally until the plan distributes them to you. The tax rules that apply to retirement plan distributions are explained in the following publications.

• Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).
• Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans).
• Publication 575, Pension and Annuity Income.
• Publication 590, Individual Retirement Arrangements (IRAs).
• Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits.

Taxmap/pubs/p564-000.htm#TXMP51236875 Comments and suggestions.

We welcome your comments about this publication and your suggestions for future editions.

You can write to us at the following address:

 
Internal Revenue Service  
Individual Forms and Publications Branch  
SE:W:CAR:MP:T:I  
1111 Constitution Ave. NW, IR-6406  
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

You can email us at *taxforms@irs.gov. (The asterisk must be included in the address.) Please put "Publications Comment" on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.

Taxmap/pubs/p564-000.htm#TXMP75ba833d Tax questions.

If you have a tax question, visit www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either of the addresses listed above.

Taxmap/pubs/p564-000.htm#TXMP0c15e625 Ordering forms and publications.

Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to one of the three addresses shown under How To Get Tax Help in the back of this publication.

Useful items

You may want to see:

See How To Get Tax Help near the end of this publication for information about getting these publications and forms.

Taxmap/pubs/p564-000.htm#TXMP4894c8b7 Tax Treatment   of Distributions

Retirement Plan, Distribution

A distribution you receive from a mutual fund may be an ordinary dividend, a qualified dividend, a capital gain distribution, an exempt-interest dividend, or a nondividend distribution. 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.

Taxmap/pubs/p564-000.htm#TXMP5cc17dd0 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.

Taxmap/pubs/p564-000.htm#TXMP2c82e2ff 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.

Taxmap/pubs/p564-000.htm#TXMP3a2d5c58 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.

Taxmap/pubs/p564-000.htm#TXMP75250410 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, nondividend distributions, or undistributed capital gains 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.)

Taxmap/pubs/p564-000.htm#TXMP2d8a7b11 Ordinary Dividends

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 1a of Form 1099-DIV or on a similar statement you receive from the mutual fund.

Taxmap/pubs/p564-000.htm#TXMP6b8cff3f Qualified dividends.

Many ordinary dividends you received are also classified as qualified dividends. The amount of your qualified dividends will be shown in box 1b of Form 1099-DIV or on a similar statement you get from the mutual fund.

Qualified dividends are taxed at the same lower rates that apply to a net capital gain. They are taxed at 15% if the regular tax rate that would apply is 25% or higher. They are taxed at 5% if the regular tax rate that would apply is lower than 25%.

To be a qualified dividend subject to the 5% or 15% rate, a dividend must meet all of the following requirements.

1. The dividend must have been paid by a U.S. corporation or a qualified foreign corporation. See chapter 1 of Publication 550 for the definition of a qualified foreign corporation.
2. The dividend must not be of a type excluded by law from the definition of a qualified dividend. See chapter 1 of Publication 550 for a list of these types of dividends.
3. You must meet the holding period requirement (discussed next).

Taxmap/pubs/p564-000.htm#TXMP7cbac673 Holding period.

You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock will not receive the next dividend payment. Instead, the seller will get the dividend.

When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it.

Taxmap/pubs/p564-000.htm#TXMP658264e4 More information.

See chapter 1 of Publication 550 for more information about qualified dividends.

Taxmap/pubs/p564-000.htm#TXMP16174175 Capital Gain Distributions

Capital Gain Distributions

These distributions are paid by mutual funds from their net realized long-term capital gains. The Form 1099-DIV (box 2a) you receive 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.

Taxmap/pubs/p564-000.htm#TXMP4ee01b86 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 your share of any tax paid because you are considered to have paid it.

Taxmap/pubs/p564-000.htm#TXMP7c5aab61 Form 2439.

The fund will send you Form 2439, instead of Form 1099-DIV, showing your share of the undistributed long-term capital gains in box 1a and any tax paid by the mutual fund in box 2. Attach Copy B of Form 2439 to your return.

Taxmap/pubs/p564-000.htm#TXMP2346f480 Increase to basis.

When you report undistributed capital gains from a mutual fund, you must increase your basis in the shares. You must keep Copy C of Form 2439 to show this increase. See Adjusted Basis, later.

Taxmap/pubs/p564-000.htm#TXMP40b55365 Exempt-Interest Dividends

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.

Taxmap/pubs/p564-000.htm#TXMP44422506 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.

Taxmap/pubs/p564-000.htm#TXMP3c790932 Nondividend   Distributions

Nondividend Distributions

A nondividend distribution is 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.

A nondividend 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 nondividend 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.

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Example.

You bought shares in a mutual fund in 2000 for $12 a share. In 2001, you received a nondividend distribution of $5 a share. You reduced your basis in each share by $5 to an adjusted basis of $7. In 2002, you received a nondividend distribution of $1 per share and further reduced your basis in each share to $6. In 2003, you received a nondividend distribution of $2 per share. Your basis was reduced to $4. In 2004, the nondividend 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.

Taxmap/pubs/p564-000.htm#TXMP6cbe76b2 Reinvestment   of Distributions

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 Nondividend Distributions, earlier. See Keeping Track of Your Basis, later, to determine the basis of the additional shares.

Taxmap/pubs/p564-000.htm#TXMP7c62e1a8 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 nondividend 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.

Taxmap/pubs/p564-000.htm#TXMP376a4917 Form 1040A.

If you file Form 1040A, report your exempt-interest dividends on line 8b. Report your ordinary dividend distributions on line 9a and your qualified dividend distributions on line 9b. If the total of the ordinary dividends you received is more than $1,500 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 9a of Form 1040A. Attach Schedule 1 to your return.

If you reported qualified dividends on line 9b, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040A instructions, or the Schedule D Tax Worksheet in the Schedule D instructions, whichever applies, to figure your tax.

Do not include capital gain distributions as dividend income on Form 1040A or Schedule 1.

Taxmap/pubs/p564-000.htm#TXMP317fca7e 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.

1. None of the Forms 1099-DIV (or substitute statements) you received have an amount in box 2b, 2c, or 2d.
2. 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.)

If you can use Form 1040A to report your capital gain distributions, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040A instructions to figure your tax.

Taxmap/pubs/p564-000.htm#TXMP6015eb2a Form 1040.

If you file Form 1040, report your exempt-interest dividends on line 8b. Report your ordinary dividend distributions on line 9a and your qualified dividend distributions on line 9b. If the total of the ordinary dividends you received is more than $1,500 or you received ordinary dividends as a nominee, first report the ordinary dividends on Schedule B, Part II, line 5. Report the total from line 6 of that schedule on line 9a of Form 1040. Attach Schedule B to your return.

If you reported qualified dividends on line 9b, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions or the Schedule D Tax Worksheet in the Schedule D instructions, whichever applies, to figure your tax.

Do not include capital gain distributions as dividend income on Form 1040 or Schedule B.

Taxmap/pubs/p564-000.htm#TXMP6b38273c 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 both of the following are true.

1. 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).
2. You do not have an amount in box 2b, 2c, or 2d, of any Form 1099-DIV (or similar statement).

If both 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 Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax.

Taxmap/pubs/p564-000.htm#TXMP70539fc6 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 69, and check box a on that line.

Taxmap/pubs/p564-000.htm#TXMP0fe9772b Table 1.

See Table 1 for more information on where to report your mutual fund distributions on Form 1040 or Form 1040A.

Table 1. Reporting Mutual Fund Distributions on Form 1040 or 1040A

If you receive . . .	AND . . .	Then report the distribution on:
		Form 1040 . . .	Form 1040A . . .
ordinary dividends (Form 1099-DIV, box 1a)	your total ordinary dividends received are $1,500 or less, and you did not receive any ordinary dividends as a nominee	line 9a	line 9a
	your total ordinary dividends received are more than $1,500, or you received ordinary dividends as a nominee	line 9a, and Schedule B, line 5	line 9a, and Schedule 1, line 5
qualified dividends (Form 1099-DIV, box 1b)		line 9b, and Qualified Dividends and Capital Gain Tax Worksheet, line 2, or Schedule D Tax Worksheet, line 2, whichever applies	line 9b, and Qualified Dividends and Capital Gain Tax Worksheet, line 2
capital gain distributions (Form 1099-DIV, box 2a)	you do not have to file Form 1040, Schedule D	line 13, and Qualified Dividends and Capital Gain Tax Worksheet, line 3	line 10, and Qualified Dividends and Capital Gain Tax Worksheet, line 3
	you have to file Form 1040, Schedule D (See Schedule D instructions for line 13)	Schedule D, Line 13	you must use Form 1040; you cannot use Form 1040A
section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b, 2c, or 2d)		Schedule D (see the Schedule D instructions)	you must use Form 1040; you cannot use Form 1040A
nondividend distributions (Form 1099-DIV, box3)		generally not reported*	generally not reported*
exempt-interest dividends (from the mutual fund statement, not reported on Form 1099-DIV)		line 8b	line 8b
undistributed capital gains (Form 2439, boxes 1a-1d)		Schedule D (see the Schedule D instructions)	you must use Form 1040; you cannot use Form 1040A
* Report any amount in any excess of your basis in your mutual fund shares on Schedule D. Use line 8 if you held the shares more than one year. Use line 1 if you held your mutual fund shares 1 year or less.

Taxmap/pubs/p564-000.htm#TXMP68c30a67 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, enter 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.

Taxmap/pubs/p564-000.htm#TXMP6015947b 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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