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taxmap/pubs/p564-000.htm#en_us_publink1000177478
Publication 564

 
Mutual Fund  
Distributions


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Reminder(p1)


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Photographs of missing children.(p1)

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.

taxmap/pubs/p564-000.htm#TXMP0a96562cIntroduction

This publication provides federal income tax information for individual shareholders of mutual funds or other regulated investment companies, including money market funds. It explains:
A comprehensive example, with filled-in forms, appears at the end of the publication.
In this publication, the term "mutual fund" means a mutual fund or other regulated investment company.
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Mutual fund.(p1)


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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.
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Money market fund.(p2)
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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.
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Qualified retirement plans and IRAs.(p2)


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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.
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Comments and suggestions.(p2)


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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-6526 
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.
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Ordering forms and publications.(p2)
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Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received.

 
Internal Revenue Service 
1201 N. Mitsubishi Motorway 
Bloomington, IL 61705-6613


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Tax questions.(p2)
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If you have a tax question, check the information available on www.irs.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of the above addresses.

taxmap/pubs/p564-000.htm#TXMP12523f8e

Useful items

You may want to see:


Publication
 550 Investment Income and Expenses
Form (and Instructions)
 Schedule B (Form 1040A or 1040): Interest and Ordinary Dividends
 Schedule D (Form 1040): Capital Gains and Losses
 1099-B: Proceeds From Broker and Barter Exchange Transactions
 1099-DIV: Dividends and Distributions
 2439: Notice to Shareholder of Undistributed Long-Term Capital Gains
 4952: Investment Interest Expense Deduction
See How To Get Tax Help near the end of this publication for information about getting these publications and forms.
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Tax Treatment  
of Distributions(p2)


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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.
EIC
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.
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Community property states.(p2)


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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. See 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.
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Share certificate in two or more names.(p2)


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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.
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Certain year-end dividends received in January.(p2)


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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.
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Tax-exempt mutual fund.(p2)


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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.)
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Ordinary Dividends(p2)


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previous topic occurrence Ordinary Dividends next topic occurrence

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.
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Qualified dividends.(p2)


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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 maximum tax 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 0% (zero%) if the regular tax rate that would apply is lower than 25%.
To be a qualified dividend subject to the 0% or 15% rate, all of the following requirements must be met.
  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).
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Holding period.(p2)
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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 is not entitled to receive the next dividend payment. 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.
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More information.(p2)
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See chapter 1 of Publication 550 for more information about qualified dividends.
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Capital Gain Distributions(p2)


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previous topic occurrence Capital Gain Distributions next topic occurrence

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.
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Undistributed capital gains.(p2)


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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.
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Form 2439.(p3)
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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.
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Increase to basis.(p3)
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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.
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Exempt-Interest Dividends(p3)


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previous topic occurrence Exempt-interest Dividends next topic occurrence

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 should send you a Form 1099-INT showing your exempt-interest dividends. Exempt-interest dividends should be shown on Form 1099-INT, box 8.
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Information reporting requirement.(p3)


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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. Form 1099-INT, box 9, should show the tax-exempt interest subject to the alternative minimum tax. If you receive exempt-interest dividends, you should see Form 6251, Alternative Minimum Tax—Individuals, for more information.
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Nondividend 
Distributions(p3)


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previous topic occurrence Nondividend Distributions next topic occurrence

A nondividend distribution is a distribution that is not out of earnings and profits and is a return of your investment, or capital, in the mutual fund and is shown on Form 1099-DIV, box 3.
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.(p3)

You bought shares in a mutual fund in 2005 for $12 a share. In 2006, 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 2007, you received a nondividend distribution of $1 per share and further reduced your basis in each share to $6. In 2008, you received a nondividend distribution of $2 per share. Your basis was reduced to $4. In 2009, 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 (Form 1040).
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Reinvestment  
of Distributions(p3)


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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.
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How To Report(p3)


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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.
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Form 1040A.(p3)


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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 on Schedule B (Form 1040A or 1040), Part II, line 5. Report the total from line 6 of that schedule on Form 1040A, line 9a. Attach Schedule B (Form 1040A or 1040) to your return.
If you reported qualified dividends on Form 1040A, line 9b, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040A instructions.
EIC
Do not include capital gain distributions as dividend income on Form 1040A or Schedule B (Form 1040A or 1040).
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Capital gain distributions.(p3)
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If you received capital gain distributions, you may have to file Form 1040. But you can report capital gain distributions on Form 1040A, line 10, 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.
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Form 1040.(p3)


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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 (Form 1040A or 1040), Part II, line 5. Report the total from line 6 of that schedule on Form 1040, line 9a. Attach Schedule B (Form 1040A or 1040) 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.
EIC
Do not include capital gain distributions as dividend income on Form 1040 or Schedule B (Form 1040A or 1040).
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Capital gain distributions.(p3)
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If you received capital gain distributions, you report them either directly on Form 1040, line 13, or on Schedule D (Form 1040), line 13, depending on your situation. Report them on Schedule D (Form 1040), line 13, unless both of the following are true.
  1. The only amounts you would have to report on Schedule D (Form 1040) are capital gain distributions from Form 1099-DIV, box 2a (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 Form 1040, line 13, 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.
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Undistributed capital gains.(p3)
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To report undistributed capital gains, you must complete Schedule D (Form 1040) and attach it to your return. Report these gains on Schedule D (Form 1040), 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 70, and check box a on that line.
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Table 1.(p3)


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See Table 1 for more information on where to report your mutual fund distributions on Form 1040 or Form 1040A.
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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 9aline 9a
 
  • your total ordinary dividends received are more than $1,500, or
  • you received ordinary dividends as a nominee
  • line 9a, and
  • Schedule B (Form 1040A or 1040), line 5
  • line 9a, and
  • Schedule B (Form 1040A or 1040), 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 Schedule D (Form 1040)
  • 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 Schedule D (Form 1040) (see Schedule D instructions for line 13)Schedule D (Form 1040), line 13you 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 (Form 1040) (see the Schedule D instructions)you must use Form 1040; you cannot use Form 1040A
nondividend distributions
(Form 1099-DIV, box 3)
 generally not reported*generally not reported*
exempt-interest dividends (Form 1099-INT, box 8) line 8bline 8b
undistributed capital gains
(Form 2439, boxes 1a-1d)
 Schedule D (Form 1040) (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 (Form 1040). Use line 8 if you held the shares more than 1 year. Use line 1 if you held your mutual fund shares 1 year or less.
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Nominees.(p3)


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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 Schedule B (Form 1040A or 1040), line 5. 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 Form 1040A, line 10, Form 1040, line 13, or Schedule D (Form 1040), line 13, 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.
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Foreign tax deduction or credit.(p3)


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Some mutual funds invest in foreign securities or other foreign 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 and the part of the dividend derived from sources in foreign countries or U.S. possessions.
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, see Publication 514, Foreign Tax Credit for Individuals.