Here are some other tax issues that affect mutual fund investors.
Table of Contents
Other pages in this guide deal with specific types of mutual fund dividends. Here is some additional general information about these dividends.
Most mutual funds allow you to reinvest your dividends, and many investors choose to do so. When you have your dividends reinvested you’re treated the same as if you received the dividend in cash and then used that money to buy additional shares. That means two things:
- You’ll report the same income from a reinvested dividend as you would from a dividend you received in cash.
- The reinvestment is an additional purchase, causing an increase in the cost basis of your overall holdings in the mutual fund.
Mutual fund companies and brokers are now required to track the basis of mutual fund shares purchased after 2011. Be sure not to overlook the increase in basis resulting from dividend reinvestments that occurred before 2012.
Reports you’ll receive
From time to time during the year you may receive statements concerning activity in your mutual fund account. Your official tax reports normally arrive in January or February, and consist of one or more of the following items:
- Form 1099-DIV, reporting most types of dividends, including dividends that represent interest.
- A tax report from the mutual fund company or your broker providing additional information, such as the portion of exempt interest that comes from different states.
- Form 2439, used in the rare occasions when a mutual fund makes an “allocation” of capital gain instead of distributing it to shareholders.
Form 1099-DIV won’t necessarily look like the official IRS form. Companies are allowed to provide “substitute” forms, which may be printed on the same page as other information you receive from your mutual fund or broker.
Note: Exempt bond funds previously reported tax-exempt interest distributions on Form 1099-INT, but this item now appears on Form 1099-DIV.
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.