[BUBUIOC INC.] Ordinary Dividends

[BUBUIOC INC.]

Most mutual funds pay at least some ordinary dividends. Even if the mutual fund is designed to generate other types of income, such as tax-exempt interest, it may have a small amount of income it must pay out as an ordinary dividend.

Almost any type of income other than long-term capital gain or tax-exempt interest will be treated as an ordinary dividend when paid out by a mutual fund. In particular:

• Taxable interest that's received by a mutual fund will be treated as an ordinary dividend when the mutual fund pays this income to its shareholders. That's why you'll get a dividend report, not an interest report, if you invest in a money market fund. If the taxable interest includes interest on federal obligations, you may be able to exclude that portion on your state income tax return.
• Short-term capital gain that's received by a mutual fund is also treated as an ordinary dividend when paid to the shareholders.

That last statement may seem surprising if you're familiar with the way capital gains work. Short-term capital gains often end up being taxed at the same rate as ordinary income, but they're not treated the same as ordinary income. In particular, if you have a large capital loss—long-term or short-term—you may be better off if you have short-term capital gain than if you have ordinary income.

But you're not allowed to treat any part of your mutual fund dividend as short-term capital gain. That's true even if the mutual fund includes information in its report telling you how much of the dividend came from short-term gains. You have to treat that amount as part of your ordinary dividend.

Ordinary dividends are taxed at the same rate as most other types of income, including wages. The tax rate depends on your overall level of taxable income. You have to report these dividends and pay tax on them even if didn't withdraw them from your account. If you chose to have your dividends reinvested in additional mutual fund shares, you still have to report the dividends. The treatment is the same as if you received the dividends in cash and immediately used them to buy additional shares.

If your ordinary dividend includes interest on federal obligations, you may be able to exclude that portion of the dividend on your state income tax return. See Federal Interest Dividends.

Reporting Ordinary Dividends

The ordinary dividend portion of your mutual fund dividend is reported the same as ordinary dividends from any other type of corporation. The way you report it depends on whether the total amount of dividends from all your investments is greater than $400...

Total Dividends $400 or Less

If the total of your dividend payments from all sources is $400 or less use the following procedure:

• Find the amount of your ordinary dividend in box 1 of Form 1099-DIV. 
• Add this amount to the total of your ordinary dividends from all other sources.
• Enter the total on line 9 of Form 1040.

Total Dividends More Than $400

If the total of your dividend payments from all sources is more than $400 use the following procedure:

• Find the amount of your ordinary dividend in box 1 of Form 1099-DIV.
• Enter this amount on line 5 of Schedule B, an attachment to Form 1040. Line 5 is actually several lines where you can enter the amount of dividends from various sources. Enter an appropriate description (such as "XYZ Growth Fund") on one of the lines at the left and put the dollar amount in the corresponding box on the right.
• Transfer the total from line 6 of Schedule B to line 9 of Form 1040.

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Posted By BUBUIOC INC. to BUBUIOC INC. at 2/04/2013 08:30:00 AM