32.3 Mutual-Fund Distributions Reported on Form 1099-DIV

Mutual-fund distributions are reported to you and the IRS by the fund on Form 1099-DIV or substitute statement. Distributions that you reinvested to acquire additional shares are reported and taxed in the same way as distributions that are actually paid out to you.

Types of distributions.

The Form 1099-DIV (or substitute statement) from your fund for 2012 may show several kinds of distributions. Distributions that you reinvested (32.2) instead of receiving in cash are included on the Form 1099-DIV.

Filing Tip

Reduced Rate for 2012 Qualified Dividends

Box 1b of Form 1099-DIV for 2012 shows your qualified dividends, the portion of the amount in Box 1a (total ordinary dividends) that is eligible for the 15% or 0% capital gain rate. These favorable rates will apply for 2013 dividends only if the 2012 rules are extended by Congress; see the e-Supplement at jklasser.com for an update.

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• Ordinary dividends—are the most common type of dividend, payable out of the fund’s earnings and profits. They are shown in Box 1a of Form 1099-DIV. Short-term capital gain distributions are reported as ordinary dividends.
• Qualified dividends—shown in Box 1b, are your share of the ordinary dividends (Box 1a) that are qualified dividends (4.2) from the fund’s investments in U.S. corporations and qualified foreign corporations. For 2012, this amount is eligible for the zero capital gain rate or the 15% capital gain rate, but only if you held your fund shares for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date (4.2).

• Capital gain distributions—shown in Box 2a of Form 1099-DIV, are your share of the net long-term capital gains realized by the fund on sales of securities in its portfolio. These are taxable to you as long-term capital gain (5.3) regardless of how long you have owned your fund shares.

• Return of capital (nontaxable) distributions—shown in Box 3 of Form 1099-DIV, are a return of your investment that reduce your basis in your shares and are not taxed until basis has been reduced to zero. If basis has been reduced to zero, you report the excess amount on Form 8949 as either short-term or long-term gain (depending on your holding period for the shares) by reporting the excess as the sales price in column (e), and reporting a zero basis in column (f). See the Form 8949 instructions for further details.

See Table 32-1 for details on how to report these and other distributions on your tax return.

Year-end dividends.

Mutual funds sometimes declare dividends at the end of a calendar year but do not pay them until January of the following year. If the dividend is declared in October, November, or December, and paid in the following January, the fund will report the distribution as taxable in the year it is declared.