Answers to Common Mutual Fund Tax Questions
- What is a cost basis?
- How do I calculate the cost basis?
- I did not redeem any money from my account. Why did I receive a Form 1099-B?
- What is a capital gain?
- Why do mutual funds pay capital gains?
- Are capital gains distributions paid by a tax-exempt fund treated as taxable income?
- Because my dividends were less than $10.00, I did
not receive a Form 1099-DIV.
How do I know how much to report? - Because I did not receive a Form 1099-DIV, do I still have to report my dividend income?
- What do I need to do with the foreign tax paid amount on my 1099-DIV?
- I have a tax-exempt fund. Do I have to report it on my state income tax?
- Why did I receive a Form 1099-R?
- Do I have to attach Form 1099-R to my federal and state tax returns?
- How do I know how much of the distribution is taxable on
my 1099R
if there is no amount in box 2A? - Do I have to pay taxes on the full amount in box 2 of my 1099-B?
- Why did I receive a Form 5498 and what do I do with it?
- Do I have to attach Form 5498 to my federal and state tax returns?
- How are taxes handled on accounts for minors?
- What tax bracket do I fall into?
What is a cost basis?
Cost basis is the price of each share plus the distributions which are received from the time of purchase to the time of redemption.
How do I calculate the cost basis?
You must calculate your cost basis anytime you redeem or exchange shares in a mutual fund. You need to calculate the amount of the gain or loss realized from the transaction. This gain or loss is a reportable transaction. To determine the cost basis, the IRS allows you to choose one of four methods to determine this amount: FIFO, Identified Cost, Average Basis Single Category or Average Basis Double Category. Princor Cost Basis Statements use the Average Basis Single Category method. Note: Once you select a method, you must use it for subsequent sales of shares of that fund. Contact your tax advisor for help in determining which method is best for your situation and for assistance in calculating your cost basis.
Things to remember when calculating your cost basis:
- Dividends or capital gain distributions that are reinvested add to the cost basis of your shares. These dividends purchase shares. Your year-end statement shows you the number of shares purchased and the price of those shares for these dividends.
- The IRS defines a "wash sale" as follows: You sold shares at a loss and purchased shares in the same fund within 30 days before or after the sale. The rules for wash sales can be very complex. Please consult a tax advisor if you suspect you are in this situation.
- Once you have chosen the method of calculating your cost basis that you are going to use, that election must be stated on your tax return and must be consistently used. If you do not state a method, the IRS will assume you are using the First-In, First -Out (FIFO) method.
- While the average cost methods are available for mutual funds, they are not acceptable for sales of other investments such as individual stocks and bonds.
- You may choose different methods for different funds; however, you must
use the same method for the life of the fund.
I did not redeem any money from my account. Why did I receive a Form 1099-B?
For tax purposes, exchanges are treated just as if you had sold your shares in one fund and used the cash to purchase shares in another fund. Thus, the same tax rules that apply to calculating gains and losses when you redeem shares apply when you exchange them.
What is a capital gain?
When you sell a capital asset, like a stock or a bond, for more than you paid for it you make a profit or experience a capital gain. For an example, if you purchase a stock for $200 and then sell it for $240, your capital gain is $40.
Why do mutual funds pay capital gains?
As a mutual fund sells a holding, it receives any profit or capital gain that results from the sale. Mutual funds, by law, must pay essentially all gains to their shareholders in capital gain distributions. These distributions, which commonly happen once or twice a year, are made fundamentally for tax reasons.
Are capital gains distributions paid by a tax-exempt fund treated as taxable income?
Yes. Capital gains distributions from a tax-exempt fund are treated as taxable income. In the event of a capital gain distribution, a 1099-DIV is sent indicating the distribution as taxable income.
Because my dividends were less than $10.00, I did not receive a Form 1099-DIV. How do I know how much to report?
Your year-end statement will have the amount of dividends that were paid to you throughout the year.
Because I did not receive a Form 1099-DIV, do I still have to report my dividend income?
Yes, if you have a tax-exempt fund, the dividends are federally tax exempt and Princor does not report these to the IRS. However, these dividends should be reported on line 8b of Form 1040. In additional, you will have to report them on your state tax return. You will need to use your year-end statement to find the amount paid to you.
What do I need to do with the foreign tax paid amount on my 1099-DIV?
Some funds that invest in foreign stocks and meet certain requirements elect to pass through foreign taxes to their shareholders. In these funds, a gross dividend is reported to each shareholder, and the recipient is allowed to offset that income with a credit based on foreign taxes paid by the fund. This credit is subject to limitations and can make tax reporting complex. Please contact your tax advisor for questions regarding your foreign tax paid credit. A letter stating all foreign tax amounts of principal funds is mailed with your 1099-DIV.
I have a tax-exempt fund. Do I have to report it on my state income tax?
Yes. The tax-exempt funds are exempt from federal taxes only. However, a portion of a tax-exempt dividend may be state tax exempt, depending on the state in which you reside. Please refer to the state listing in the tax reporting supplement enclosed with your 1099's.
Why did I receive a Form 1099-R?
You received the Form 1099-R because you received a distribution from your Princor IRA. This transaction is treated as a taxable event. Generally, IRA distributions are treated as taxable income for the year in which the distribution is received.
But I reinvested this into another IRA? (three possible answers depending on the situation)
- Distributions from a traditional IRA are taxable to the shareholder unless the money is rolled over into another Traditional IRA within 60 calendar days of the date the shareholder receives the money.
- If a shareholder has a Rollover IRA and requests a direct rollover to the same type of plan that the monies originated from the shareholder would receive a 1099-R with the distribution code of "G". This type of distribution is not taxable to the shareholder.
- If a shareholder removes an excess contribution from his or her IRA prior to his tax filing deadline plus extensions, only the earnings are taxable. The distribution is reported on the 1099-R but the earnings are the only portion that is reported as taxable.
Do I have to attach Form 1099-R to my federal and state tax returns?
Yes. You must attach Form 1099-R to your federal and state tax returns.
How do I know how much of the distribution is taxable on my 1099R if there is no amount in box 2A?
You will want to note that Box 2b has been checked "Taxable amount not determined." Tax laws have permitted IRA's to hold nondeductible contributions since January of 1987. Nondeductible contributions are made using income which has already been taxed. For IRA's funded with deductible and nondeductible contributions, special rules apply when figuring the tax on distributions. Note: See IRS Publications 590 for additional information.
Do I have to pay taxes on the full amount in box 2 of my 1099-B?
In order to determine a capital gain or loss when you sell or exchange shares, you need to have two figures: The beginning value and the ending value. The ending value is simply the price at which shares are redeemed. The beginning value isn't necessarily the purchase price because it can change over time through various transactions. You need to calculate a share cost or cost basis. This will determine your gain from selling or your loss from selling.
Why did I receive a Form 5498 and what do I do with it?
Princor is required to provide you with a statement of your account's fair market value as of December 31 if you have reportable activity. You will receive a Form 5498 by May 31.
Do I have to attach Form 5498 to my federal and state tax returns?
No. You will not have to attach Form 5498 to your federal and state tax returns.
How are taxes handled on accounts for minors?
A Uniform Transfer to Minors Act (UTMA) account is a custodial account opened by an adult as custodian for a minor (child). Any gifts to these accounts are irrevocable: the donor may not take back the gift, nor may the minor return the gift unless he/she has reached the age of majority (state laws range from 18-21). When the minor reaches the age of majority, custodianship of the account ends and the child may take control of the funds. The minor's Social Security Number appears on the account and the minor must file an annual income tax return and pay taxes on any income produced. Taxes on UTMA accounts depend on the amount and type of the income earned. The income may be taxed at the parent's marginal tax rate rather than the child's potentially lower rate.
| Child's Age | Amount of Income | Federal Tax Rate (2007 federal tax rules) |
|---|---|---|
| Less than 14 years | $0-$800 earned or unearned | Not Taxed |
| Less than 14 years | $801-$1600 unearned | Child's Rate |
| Less than 14 years | Above $1600 unearned | Parent's Rate |
| 14 years and over | All income above $800 (earned and unearned) | Child's Rate |
What tax bracket do I fall into?
| Singles Taxable Income | Married Filing Jointly Taxable Income |
Federal Tax Rate (2007 federal tax rules) |
|---|---|---|
| $0 - $7,824 | $0 - $15,649 | 10% |
| $7,825 - $31,849 | $15,650 - $63,699 | 15% |
| $31,850 - $77,099 | $63,700 - $128,499 | 25% |
| $77,100 - $160,849 | $128,500 - $195,849 | 28% |
| $160,850 - $349,699 | $195,850 - $349,699 | 33% |
| Over $349,700 | Over $349,700 | 35% |
Before investing in mutual funds, investors should carefully consider the investment objectives, risks, charges and expenses of the funds. This and other information is contained in the free prospectus, which can be obtained by:
- Calling 1.800.222.5852 and requesting a prospectus (all share classes)
- Downloading a prospectus (A, B & C shares)
- Downloading a prospectus (J shares)
- Requesting a prospectus be mailed to you (A, B & C shares)
- Requesting a prospectus be mailed to you (J shares)
Please read the prospectus carefully before investing. See the mutual fund section of our site for a description of the different share classes.
