[BUBUIOC INC.] Overview of Mutual Funds and Dividends

[BUBUIOC INC.]

Mutual funds can pay four different types of dividends, and in addition make two different types of allocations that affect your tax return. Some of these items are further broken down into subcategories. That may seem like a lot to learn, but chances are that any one mutual fund you invest in will generate only two or three of these items.

We'll start by looking at the reports you'll receive from your broker or mutual fund company. Then we'll identify each type of dividend and explain how to handle it.

Note: Your mutual fund dividends are taxable even if you choose to reinvest them. Generally, when you choose to reinvest your dividends you're treated the same as if you received the dividend in cash and then used it to buy additional shares.

Reports You'll Receive

From time to time during the year you may receive statements concerning activity in your mutual fund account. Those statements will provide information concerning dividends, but these are not your official tax reports. The tax reports normally arrive in January or early February, and consist of one or more of the following items:

• Form 1099-DIV, Dividends and Distributions.
• Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains.
• A tax report from the mutual fund company or your broker.

Form 1099-DIV

This form reports up to three types of dividends, plus your share of the fund's foreign tax payments, if any. Mutual fund companies are permitted to use the official IRS form, or to provide you with a substitute Form 1099-DIV that gives the same information. The substitute form doesn't have to be on a separate sheet of paper. It can be printed on the same page as other information.

Form 1099-DIV provides the following information:

• The total ordinary dividends you received for the year, in box 1 of the form.
• The total capital gain distributions you received for the year, in box 2a of the form. Subcategories of capital gain distributions are broken out in boxes 2b, 2c and 2d.
• The total nontaxable distributions you received for the year, in box 3 of the form.
• Your share of the fund's foreign tax paid for the year in box 6 of the form.

Form 2439

This form reports information about undistributed long-term capital gains that are allocated to you, even though they were not paid out to you. If you didn't get one of these forms, don't worry. Most mutual funds don't make this type of allocations, so most mutual fund investors don't receive this form. If you do get one, you can find more details on the page dealing with Mutual Fund Capital Gain Allocations.

Mutual Fund Tax Report

The mutual fund may send you a report providing additional tax information. If the fund paid any exempt-interest dividends, this report is where you'll find that information. The report may provide additional information, too:

• How much of your exempt-interest dividend is potentially subject to alternative minimum tax (AMT).
• How much of your exempt-interest dividend is from various states. (This information doesn't affect your federal income tax return, but may affect your state income tax return.)
• How much of the ordinary dividend represents interest on federal obligations that's exempt from state income tax.

There's no special format for this report, but it's usually easy enough to identify. Just make sure you don't throw out anything you receive from your mutual fund or broker during January or February!

January Dividends

There's a special rule you should be aware of if you receive dividends in January. Mutual funds are permitted to treat certain January dividends as if they were paid in the previous year. It may seem like a mistake when the mutual fund reports this income as if you received it in December of the previous year. It's not a mistake, though, just a special feature of the way the tax law treats mutual funds.

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Posted By BUBUIOC INC. to BUBUIOC INC. at 2/18/2013 08:30:00 AM