Publication 564 |
2003 Tax Year |
Publication 564 Main Contents
This is archived information that pertains only to the 2003 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
Tax Treatment
of Distributions
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 nontaxable return of capital. 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.
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.
Community property states.
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. Get 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.
Share certificate in two or more names.
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.
Certain year-end dividends received in January.
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.
Tax-exempt mutual fund.
Distributions from a tax-exempt mutual fund (one that invests primarily in tax-exempt securities) may consist of ordinary
dividends, capital gain
distributions, undistributed capital gains, or return of capital 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.)
Ordinary Dividends
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.
Qualified dividends.
Many ordinary dividends you received in 2003 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 lower 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 5% if the regular tax rate that would apply is 10% or 15%.
To be a qualified dividend subject to the 5% or 15% rate, a dividend must meet all of the following requirements.
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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.
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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.
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You must meet the holding period requirement (discussed next).
Holding period.
You must have held the stock for more than 60 days during the 120-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 will not receive the next dividend
payment.
Instead, the seller will get the dividend.
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.
More information.
See chapter 1 of Publication 550 for more information about qualified dividends.
As this publication was being prepared for print, Congress was considering legislation that would change the holding period
requirement for a
qualified dividend. For more information about this and other important tax changes, see Publication 553, Highlights of 2003
Tax Changes.
Capital Gain Distributions
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.
Undistributed capital gains.
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 any
tax paid because you are
considered to have paid it.
Form 2439.
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.
Increase to basis.
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.
Exempt-Interest Dividends
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 will send you a statement within 60 days
after the close of its tax year showing your exempt-interest dividends. Exempt-interest dividends are not shown on Form 1099–DIV.
Information reporting requirement.
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. If you receive exempt-interest dividends, you should get Form 6251, Alternative
Minimum Tax—Individuals, for more information.
Return of Capital
(Nontaxable) Distributions
A distribution that is not out of earnings and profits is a return of your investment, or capital, in the mutual fund and
is shown in box 3 of Form
1099–DIV. These return of capital distributions are generally not taxed and are sometimes called tax-free dividends or nontaxable
distributions.
A return of capital 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 return of capital 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.
Example.
You bought shares in a mutual fund in 1999 for $12 a share. In 2000, you received a return of capital distribution of $5 a
share. You reduced your
basis in each share by $5 to an adjusted basis of $7. In 2001, you received a return of capital distribution of $1 per share
and further reduced your
basis in each share to $6. In 2002, you received a return of capital distribution of $2 per share. Your basis was reduced
to $4. In 2003, the return
of capital 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.
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 Return of Capital (Nontaxable) Distributions, earlier. See Keeping
Track of Your Basis, later, to determine the basis of the additional shares.
How To Report
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.
Form 1040A.
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 in Part II of Schedule 1, on line 5. Report the total from line 6 of that schedule
on line 9a of Form
1040A. Attach Schedule 1 to your return.
If you reported qualified dividends on line 9b, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040A
instructions to figure your tax.
Do not include capital gain distributions as dividend income on Form 1040A or Schedule 1.
Capital gain distributions.
If you received capital gain distributions, you may have to file Form 1040. But you can report capital gain distributions
on line 10a of Form
1040A, instead of on Form 1040, if both of the following are true.
-
None of the Forms 1099–DIV (or substitute statements) you received have an amount in box 2c, 2d, 2e, or 2f.
-
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, report any post-May 5 capital gain distributions
on line 10b. Use the
Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040A instructions to figure your tax.
Form 1040.
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 in Part II of Schedule B, on line 5. Report the total from line 6 of that schedule
on line 9a of Form
1040. Attach Schedule B to your return.
If you reported qualified dividends on line 9b, you must figure your tax by completing either Schedule D (Form 1040)
or the Qualified
Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions.
Do not include capital gain distributions as dividend income on Form 1040 or Schedule B.
Capital gain distributions.
If you received capital gain distributions, you report them either directly on Form 1040, line 13a or on Schedule
D, line 13, depending on your
situation. Report them on Schedule D, line 13, unless all of the following are true.
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The only amounts you would have to report on Schedule D are capital gain distributions from box 2a of Form 1099–DIV (or similar
statement) and post-May 5 capital gain distributions from box 2b.
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You do not have an amount in box 2c, 2d, 2e, or 2f of any Form 1099–DIV (or similar statement).
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You are not filing Form 4952 or, if the amount on line 4g of that form includes any qualified dividends, it also includes
all of your net
capital gain from the disposition of property held for investment.
If all of the above statements are true, report your capital gain distributions directly on line 13a of Form 1040 and check
the box on that
line. Report any post-May 5 capital gain distributions on line 13b. Also, use the Qualified Dividends and Capital Gain Tax Worksheet in the
Form 1040 instructions to figure your tax.
Undistributed capital gains.
To report undistributed capital gains, you must complete Schedule D and attach it to your return. Report these gains
on Schedule D, 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 67, and
check box a on that line.
Tables 1A and 1B.
See Tables 1A and 1B for more information on where to report your mutual fund distributions on Form 1040 or Form 1040A.
Nominees.
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 line 5 of Schedule B (Form 1040) or Schedule
1 (Form 1040A). 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 line 10a of Form 1040A, line 13a of Form 1040, or Schedule D (Form 1040), 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.
Foreign tax deduction or credit.
Some mutual funds invest in foreign securities or other 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 to each country or possession and the part of the dividend derived from sources in each country or possession.
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, get Publication 514,
Foreign Tax Credit
for Individuals.
Keeping Track
of Your Basis
You should keep track of your basis in mutual fund shares because you need the basis to figure any gain or loss on the shares
when you sell,
exchange, or redeem them.
Original basis.
As explained in the following paragraphs, original basis depends on how you acquired your shares.
Adjusted basis.
As described later under Adjusted Basis, your original basis is adjusted (increased or decreased) by certain events. You must keep
accurate records of all events that affect basis so you can figure the proper amount of gain or loss.
Shares Acquired by Purchase
The original basis of mutual fund shares you bought is usually their cost or purchase price. The purchase price usually includes
any commissions or
load charges paid for the purchase.
Example.
You bought 100 shares of Fund A for $10 a share. You paid a $50 commission to the broker for the purchase. Your cost basis
for each share is $10.50
($1,050 ÷ 100).
When you buy or sell shares in a fund, keep the confirmation statements you receive. The statements show the price you paid
for the shares when you
bought them and the price you received for the shares when you disposed of them. The information from the confirmation statement
when you purchased
the shares will help you figure your basis in the fund.
Commissions and load charges.
The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. You can usually add
acquisition fees and charges to
your cost of the shares and thereby increase your basis. A fee paid to redeem the shares is usually a reduction in the redemption
price (sales price).
You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following
conditions apply.
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You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge.
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You dispose of the shares within 90 days of the purchase date.
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You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because
of the
reinvestment right you got when you acquired the original shares.
The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares.
The rest of the original
fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of
the new shares).
Reinvestment right.
This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge,
or by paying a reduced fee
or load charge.
Shares Acquired by Reinvestment
The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions
used to purchase
each full or fractional share. This rule applies even if the distribution is an exempt-interest dividend that you do not report
as income.
When you acquire shares through reinvestment, keep the statements that show each date, amount, and number of full or fractional
shares purchased.
Keep track of any adjustments to basis of the shares as they occur.
Generally, you must know the basis per share to compute gain or loss when you dispose of the shares. This is explained under
Identifying the Shares Sold, later.
Shares Acquired by Gift
To determine your original basis of mutual fund shares you acquired by gift, you must know:
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The donor's adjusted basis,
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The date of the gift,
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The fair market value (the last quoted public redemption price) of the shares at the time of the gift, and
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Any gift tax paid on the gift of the shares.
Fair market value less than donor's adjusted basis.
If the fair market value (FMV) of the shares at the time of the gift was less than the adjusted basis to the donor
at the time of the gift, your
basis for gain on their disposition is the donor's adjusted basis. Your basis for loss is the FMV of the shares at the time of
the gift. In this situation, it is possible to sell the shares at neither a gain nor a loss because of the basis you have
to use.
Example.
You are given mutual fund shares with an adjusted basis of $10,000 at the time of the gift. The FMV of the shares at the time
of the gift is
$9,000. You later sell the shares for $9,500. The basis for figuring a gain is $10,000, so there is no gain. There also is
no loss, since the basis
for figuring a loss is $9,000. In this situation, you have neither a gain nor a loss.
Fair market value equal to or more than donor's adjusted basis.
If the FMV of the shares at the time of the gift was equal to or more than the donor's adjusted basis at the time
of the gift, your basis is the
donor's adjusted basis at the time of the gift, plus all or part of any gift tax paid on the gift, depending on the date of
the gift.
For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551, Basis
of Assets.
Shares Acquired by Inheritance
If you inherited shares in a mutual fund, your original basis is generally the fair market value (FMV) (the last quoted public
redemption price) on
the date of the decedent's death, or the alternate valuation date if chosen for estate tax purposes.
Community property states.
In community property states, you and your spouse generally are considered to each own half the
estate (excluding separate property). If one spouse dies and at least half of the community interest is includible in the
decedent's gross estate
(whether or not the estate is required to file a return), the FMV of the community property at the date of death becomes the
basis of both halves of
the property.
For example, if the FMV of the entire community interest in a mutual fund is $100,000, the basis of the surviving
spouse's half of the shares is
$50,000. The basis of the heirs' half of the shares also is $50,000.
In determining the basis of assets acquired from a decedent, property held in joint tenancy is community property
if its status was community
property under state law.
Shares you gave the decedent.
A different basis rule applies to inherited shares that you or your spouse gave the decedent within the 1-year period
ending on the date of the
decedent's death if, on the date of the gift, the shares were appreciated property. In this situation, the basis of the inherited shares is
the decedent's adjusted basis in them immediately before his or her death, rather than their FMV.
This basis rule also applies if the decedent's estate (or a trust of which the decedent was the grantor) sells the
shares instead of distributing
them to you, and you are entitled to the proceeds.
Appreciated property.
Appreciated property is any property (including mutual fund shares) whose FMV is more than its adjusted basis.
Exceptions.
This basis rule does not apply if the decedent died before 1982 or you gave the shares to the decedent before August
14, 1981.
Adjusted Basis
After you acquire mutual fund shares, you may need to make adjustments to your basis. The adjusted basis of your shares is
your original basis
(defined earlier), increased or reduced as described here.
Addition to basis.
Increase the basis in your shares by the difference between the amount of undistributed capital gain you include in
income and the tax considered
paid by you on that income.
The mutual fund reports the amount of your undistributed capital gain in box 1a of Form 2439. You should keep Copy
C of all Forms 2439 to show
increases in the basis of your shares.
Reduction of basis.
You must reduce your basis in your shares by any return of capital distributions that you receive from the fund.
The mutual fund reports the amount of any return of capital distributions in box 3 of Form 1099–DIV. You should keep
the form to show the
decrease in the basis of your shares.
No reduction of basis.
You do not reduce your basis for distributions from the fund that are exempt-interest dividends.
Table 2. Mutual Fund Record
Mutual Fund |
Acquired
1 |
Adjustment to Basis Per Share |
Adjusted
2 Basis Per Share
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Sold or redeemed |
Date |
Number of Shares |
Cost Per Share |
Date |
Number of Shares |
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1 Include share received from reinvestment of distributions.
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2 Cost plus or minus adjustments.
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Table 2. This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. Enter the cost per share when
you acquire new shares and any adjustments to their basis when the adjustment occurs. This worksheet will help you figure
the adjusted basis when you
sell or redeem shares.
Sales, Exchanges,
and Redemptions
When you sell or exchange your mutual fund shares, or if they are redeemed (a redemption), you will generally have a taxable
gain or a deductible
loss. This also applies to shares of a tax-exempt mutual fund. Sales, exchanges, and redemptions are all treated as sales
of capital assets. The
amount of the gain or loss is the difference between your adjusted basis (defined earlier) in the shares and the amount you
realize from the sale,
exchange, or redemption. This is explained further under Gains and Losses, later.
Sale.
In general, a sale is a transfer of shares for money only.
Exchange.
An exchange is a transfer of shares in return for other shares.
Redemption.
A redemption occurs when a fund reacquires its shares from you in exchange for money or other property.
Recordkeeping. When there is a sale, exchange, or redemption of your shares in a fund, keep the
confirmation statement you receive. The statement shows the price you received for the shares and other information you need
to report gain or loss on
your return.
Exchange of shares in one mutual fund for shares in another mutual fund.
Any exchange of shares in one fund for shares in another fund is a taxable exchange. This is true even if you exchange
shares in one fund for
shares in another fund within the same family of funds. Report any gain or loss on the shares you gave up as a capital gain
or loss in the year in
which the exchange occurs. Usually, you can add any service charge or fee paid in connection with an exchange to the cost
of the shares acquired. For
an exception, see Commissions and load charges under Shares Acquired by Purchase, earlier.
Information returns.
Mutual funds and brokers must report proceeds from sales, exchanges, or redemptions to the Internal Revenue
Service. They must give each customer a written statement with that information by January 31 of the year following the calendar
year the transaction
occurred. Form 1099–B, or a substitute, may be used for this purpose.
Report your sales shown on Form(s) 1099–B (or substitute) on Schedule D (Form 1040) along with your other gains and
losses. If the total of
the sales price amounts reported on Form(s) 1099–B in box 2 is more than the total you report on lines 3 and 10 of Schedule D, attach
a statement to your return explaining the difference.
Taxpayer identification number.
You must give the broker your correct taxpayer identification number (TIN). Generally, an individual will use his
or her social security number as
the TIN.
If you do not provide your TIN, your broker is required to withhold tax on the gross proceeds of a transaction. For
2004, the withholding rate is
28%. In addition, you may be penalized.
Identifying the Shares Sold
To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis
of those shares. If
your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficult.
However, shares are
generally acquired at various times, in various quantities, and at various prices. Therefore, figuring your basis can be more
difficult. You can
choose to use either a cost basis or an average basis to figure your gain or loss.
Cost Basis
You can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange,
or redemption of
other shares in the same mutual fund.
To figure cost basis, you can choose one of the following methods.
Specific share identification.
If you adequately identify the shares you sold, you can use the adjusted basis of those particular shares to figure
your gain or loss.
You will adequately identify your mutual fund shares, even if you bought the shares in different lots at various prices
and times, if you:
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Specify to your broker or other agent the particular shares to be sold or transferred at the time of the sale or transfer,
and
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Receive confirmation in writing from your broker or other agent within a reasonable time of your specification of the particular
shares sold or transferred.
You continue to have the burden of proving your basis in the specified shares at the time of sale or transfer.
First-in first-out (FIFO).
If your shares were acquired at different times or at different prices and you cannot identify which shares you sold,
use the basis of the shares
you acquired first as the basis of the shares sold. In other words, the oldest shares you own are considered sold first. You
should keep a separate
record of each purchase and any dispositions of the shares until all shares purchased at the same time have been disposed of completely.
Table 3 (on the next page) illustrates the use of the FIFO method to figure the cost basis of shares sold, compared with the use of
the
single-category method to figure average basis (discussed next).
Average Basis
You can figure your gain or loss using an average basis only if you acquired the shares at various times and prices, and you
left the shares on
deposit in an account handled by a custodian or agent who acquires or redeems those shares.
To figure average basis, you can use one of the following methods.
-
Single-category method.
-
Double-category method.
Once you elect to use an average basis, you must continue to use it for all accounts in the same fund. (You must also continue
to use the same
method.) However, you may use the cost basis (or a different method of figuring the average basis) for shares in other funds,
even those within the
same family of funds.
Example.
You own two accounts that hold shares of the income fund issued by Company A. You also own 100 shares of the growth fund issued
by Company A. If
you elect to use average basis for the first account of the income fund, you must use average basis for the second account.
However, you may use cost
basis for the growth fund.
You may be able to find the average basis of your shares from information provided by the fund.
Single-category method.
Under the single-category method, you find the average basis of all shares owned at the time of each disposition, regardless of how long
you owned them. Include shares acquired with reinvested dividends or capital gain distributions.
Table 3 illustrates the use of the single-category method to figure the average basis of shares sold, compared with the use of the
FIFO
method to figure cost basis (discussed earlier).
Even though you include all unsold shares of a fund in a single category to compute average basis, you may have both
short-term and long-term gains
or losses when you sell these shares. To determine your holding period, the shares disposed of are considered to be those
acquired first.
Example.
You bought 400 shares in the LJO Mutual Fund: 200 shares on May 15, 2002, and 200 shares on May 15, 2003. On November 11,
2003, you sold 300
shares. The basis of all 300 shares sold is the same, but you held 200 shares for more than 1 year, so your gain or loss on
those shares is long-term.
You held 100 shares for 1 year or less, so your gain or loss on those shares is short-term.
How to figure the basis of shares sold. To figure the basis of shares you sell, use the steps in the following worksheet.
Example 1.
You bought 300 shares in the LJP Mutual Fund: 100 shares in 2000 for $1,000 ($10 per share); 100 shares in 2001 for $1,200
($12 per share); and 100
shares in 2002 for $2,600 ($26 per share). Thus, the total cost of your shares was $4,800 ($1,000 + $1,200 + $2,600). On May
16, 2003, you sold 150
shares. The basis of the shares you sold is $2,400 ($16 per share), figured as follows.
Remaining shares.
The average basis of the shares you still hold after a sale of some of your shares is the same as the average basis
of the shares sold. The next
time you make a sale, your average basis will still be the same, unless you have acquired additional shares (or have made
a subsequent adjustment to
basis).
Example 2.
The facts are the same as in Example 1, except that you sold an additional 50 shares on December 15, 2003. You do not need to recompute
the average basis of the 150 shares you owned at that time because you acquired or sold no shares, and had no other adjustments
to basis, since the
last sale. Your basis is the $16 per share figured earlier.
Example 3.
The facts are the same as in Example 1, except that you bought an additional 150 shares at $14 a share on September 19, 2003, and then
sold 50 shares on December 16, 2003. The total adjusted basis of all the shares you owned just before the sale is $4,500,
figured as follows.
The basis of the shares sold is $750 ($15 a share), figured as follows.
Double-category method.
In the double-category method, all shares in an account at the time of each disposition are divided into two categories:
short-term and long-term.
Shares held 1 year or less are short-term. Shares held longer than 1 year are long-term.
The basis of each share in a category is the average basis for that category. This is the total remaining basis of
all shares in that category at
the time of disposition divided by the total shares in the category at that time. To use this method, you specify, to the
custodian or agent handling
your account, from which category the shares are to be sold or transferred. The custodian or agent must confirm in writing your
specification. If you do not specify or receive confirmation, you must first charge the shares sold against the long-term
category and then charge any
remaining shares sold against the short-term category.
Changing categories.
After you have held a mutual fund share for more than 1 year, you must transfer that share from the short-term category
to the long-term category.
The basis of a transferred share is its actual cost or other basis to you unless some of the shares in the short-term category
have been disposed of.
In that case, the basis of a transferred share is the average basis of the undisposed shares at the time of the most recent
disposition from this
category.
Making the choice.
You choose to use the average basis of mutual fund shares by clearly showing on your income tax return, for each year
the choice applies, that you
used an average basis in reporting gain or loss from the sale or transfer of the shares. You must specify whether you used
the single-category method
or the double-category method in determining average basis. This choice is effective until you get permission from the IRS
to revoke it.
Shares received as gift.
If your account includes shares that you received by gift, and the fair market value of the shares at the time of
the gift was not more than the
donor's basis, special rules apply. You cannot choose to use the average basis for the account unless you submit a statement
with your initial choice.
It must state that the basis used in figuring the average basis of the gift shares will be the FMV at the time of the gift.
This statement applies to
gift shares received before and after making the choice, as long as the choice to use the average basis is in effect.
Table 3. Example of How To Figure Basis of Shares Sold
This is an example showing two different ways to figure basis. It compares the cost basis using the
FIFO method with the average basis using the single-category method.
|
Date |
Action |
Share Price |
No. of Shares |
Total Shares Owned |
02/05/02 |
Invest $4,000 |
$25 |
160 |
160 |
08/06/02 |
Invest $4,800 |
$20 |
240 |
400 |
12/17/02 |
Reinvest $300 dividend |
$30 |
10 |
410 |
09/30/03 |
Sell 210 shares for $6,720 |
$32 |
210 |
200 |
|
COST BASIS (FIFO)
|
To figure the basis of the 210 shares sold on 9/30/03, use the share price of the first
210 shares you bought, namely the 160 shares you purchased on 2/5/02 and 50 of those purchased on 8/6/02.
|
|
|
|
$4,000 (cost of 160 shares on 2/5/02) |
|
+ |
$1,000 (cost of 50 shares on 8/6/02)
|
|
Basis = |
$5,000 |
|
AVERAGE BASIS (single-category)
|
To figure the basis of the 210 shares sold on 09/30/03, use the average basis of all 410 shares owned
on 9/30/03.
|
|
|
$9,100 (cost of 410 shares) |
|
|
÷410 (number of shares)
|
|
|
$22.20 (average basis per share) |
|
|
|
$22.20 |
|
|
|
×210 |
|
Basis = |
$4,662 |
Gains and Losses
You figure gain or loss on the disposition of your shares by comparing the amount you realize with the adjusted basis of your
shares. If the amount you realize is more than the adjusted basis of the shares, you have a gain. If the amount you realize
is less than the adjusted
basis of the shares, you have a loss.
Amount you realize.
The amount you realize from a disposition of your shares is the money and value of any property you receive for the
shares disposed of, minus your
expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees).
Adjusted basis.
Adjusted basis is explained under Keeping Track of Your Basis, earlier. Also see the explanations of cost basis and average basis under
Identifying the Shares Sold, earlier.
Wash sales.
If you sell mutual fund shares at a loss and within 30 days before or after the sale you buy, acquire in a taxable exchange, or acquire
a contract or option to buy substantially identical shares, you have a wash sale. You cannot deduct losses from wash sales.
Substantially identical.
In determining whether the shares are substantially identical, you must consider all the facts and circumstances.
Ordinarily, shares issued by one
mutual fund are not considered to be substantially identical to shares issued by another mutual fund.
For more information on wash sales, get Publication 550.
Reporting information from Form 1099–B.
Mutual funds and brokers report dispositions of mutual fund shares on Form 1099–B, or a substitute form containing
substantially the same
language. The form shows the amount of the sales price and indicates whether the amount reported is the gross amount or the
net amount (gross amount
minus commissions).
If your Form 1099–B or similar statement from the payer shows the gross sales price, do not subtract the expenses
of sale from it when
reporting your sales price in column (d) on Schedule D. Instead, report the gross amount in column (d) and increase your cost
or other basis, column
(e), by any expense of the sale. If your Form 1099–B shows that the gross sales price less commissions was reported to IRS,
enter the net amount
in column (d) of Schedule D and do not increase your basis in column (e) by the sales commission.
Example 1.
You sold 100 shares of Fund HIJ for $2,500. You paid a $75 commission to the broker for handling the sale. Your Form 1099–B
shows that the
net sales proceeds, $2,425 ($2,500 - $75), were reported to the IRS. Report $2,425 in column (d) of Schedule D.
Example 2.
You sold 200 shares of Fund KLM for $10,000. You paid a $100 commission at the time of the sale. You bought the shares for
$5,000. The broker
reported the gross proceeds to IRS on Form 1099–B, so you enter $10,000 in column (d) of Schedule D and increase your basis
in column (e) to
$5,100.
Note.
Whether you use Schedule D's line 1 (for a short-term gain or loss) or line 8 (for a long-term gain or loss) depends on how
long you held the
shares, discussed next.
Holding Period
When you dispose of your mutual fund shares, you must determine your holding period. Your holding period determines whether
the gain or loss is a
short-term capital gain or loss or a long-term capital gain or loss.
Short-term gain or loss.
If you hold the shares for 1 year or less, your gain or loss will be a short-term gain or loss.
Long-term gain or loss.
If you hold the shares for more than 1 year, your gain or loss will be a long-term gain or loss.
Determining period held.
Determine your holding period by using the trade dates of your purchases and your sales. The trade date is the date on which you
contract to buy or sell shares. Most mutual funds will show the trade dates on confirmation statements showing your purchases
and sales.
Do not confuse the trade date with the settlement date, which is the date by which the mutual fund shares must be delivered and payment
must be made.
To find out how long you have held your shares, begin counting on the day after the trade date on which you bought the shares.
(Do not count the
trade date itself.) The trade date on which you dispose of the shares is counted as part of your holding period.
Example.
If you bought shares on January 11, 2002 (trade date), and sold them on January 11, 2003 (trade date), your holding period
would not be more than 1
year. If you sold them on January 12, 2003, your holding period would be more than 1 year (12 months plus 1 day).
Mutual fund shares received as a gift.
If you receive a gift of mutual fund shares and your basis is determined by the donor's basis, your holding period
is considered to have started on
the same day that the donor's holding period started.
Inherited mutual fund shares.
If you inherit mutual fund shares, you are considered to have held the shares for more than 1 year, regardless of
how long you actually held them.
Report the sale of inherited mutual fund shares on line 8 of Schedule D and enter “INHERITED” in column (b) instead of the date you
acquired the shares.
Reinvested distributions.
If your dividends and capital gain distributions are reinvested in new shares, the holding period of each new share
begins the day after that share
was purchased. Therefore, if you sell both the new shares and the original shares, you might have both short-term and long-term
gains and losses.
Certain short-term losses.
Special rules may apply if you have a short-term loss on the sale of shares on which you received an exempt-interest
dividend or a capital gain
distribution.
Exempt-interest dividends before short-term loss.
If you received exempt-interest dividends on mutual fund shares that you held for 6 months or less and sold at a loss,
you may claim only the part
of the loss that is more than the exempt-interest dividends. On Schedule D, column (d), increase the sales price by the amount
of exempt-interest
dividends. Report the loss as a short-term capital loss.
Example.
On January 8, 2003, you bought a mutual fund share for $40. On February 4, 2003, the mutual fund paid a $5 dividend from tax-exempt
interest, which
is not taxable to you. On February 12, 2003, you sold the share for $34. If it were not for the tax-exempt dividend, your
loss would be $6 ($40
- $34). However, you must increase the sales price from $34 to $39 (to account for the $5 portion of the loss that is not
deductible). You can
deduct only $1 as a short-term capital loss.
Capital gain distribution before short-term loss.
Generally, if you received capital gain distributions (or had to report undistributed capital gains) on mutual fund
shares that you held for 6
months or less and sold at a loss, report only the part of the loss that is more than the capital gain distribution (or undistributed
capital gain) as
a short-term capital loss. The rest of the loss is reported as a long-term capital loss.
Example.
On April 8, 2003, you bought a mutual fund share for $20. On June 25, 2003, the mutual fund paid a capital gain distribution
of $2 a share, which
is taxed as a long-term capital gain. On July 11, 2003, you sold the share for $17.50. If it were not for the capital gain
distribution, your loss
would be a short-term loss of $2.50 ($20–$17.50). However, the part of the loss that is not more than the capital gain distribution
($2) must be
reported as a long-term capital loss. The remaining $0.50 of the loss can be reported as a short-term capital loss.
Loss on share that paid qualified dividends.
Any loss on the sale or exchange of a mutual fund share must be treated as a long-term capital loss to the extent
you received, from that share,
qualified dividends (defined earlier) that are extraordinary dividends. This is true regardless of how long you actually held
the share. Generally, an
extraordinary dividend is a dividend that equals or exceeds 10% (5% in the case of preferred stock) of your adjusted basis
in the mutual fund share.
How To Figure Net Gain or Loss
Separate your short-term gains and losses from your long-term gains and losses on all the mutual fund shares and other capital
assets you disposed
of during the year. Then determine your net short-term gain or loss and your net long-term gain or loss.
Net short-term capital gain or loss.
Net short-term capital gain or loss is determined by adding the gains and losses from lines 1 through 6 in column
(f) of Part I, Schedule D (Form
1040). Line 7b is the net short-term capital gain or loss.
Net long-term capital gain or loss.
Net long-term capital gain or loss is determined by adding the gains and losses from lines 8 through 14 in column
(f) of Part II, Schedule D (Form
1040). Line 16 is the net long-term capital gain or loss.
Your net long-term capital gain or loss includes any undistributed capital gains you reported on line 11 of Schedule
D and any capital gain
distributions you reported on line 13 of Schedule D.
Total net gain or loss.
The total net gain or loss is determined by combining the net short-term capital gain or loss on line 7b with the
net long-term capital gain or
loss on line 16. Enter the result on line 17a of Part III, Schedule D (Form 1040). If line 17a shows a gain, enter the amount
on line 13a of Form
1040. If line 17a shows a loss, see Limit on Capital Loss Deduction, later.
Figuring Your Tax
If you are reporting capital gain distributions on Form 1040A, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form
1040A instructions to figure your tax. See How To Report, earlier, to see whether you can report your capital gain distributions on Form
1040A.
If you are reporting capital gain distributions on Form 1040, but are not required to file Schedule D, use the Qualified Dividends and Capital
Gain Tax Worksheet in the Form 1040 instructions to figure your tax. See How To Report, earlier, to see whether you must file
Schedule D.
If you are required to file Schedule D, you will need to use Part IV of Schedule D (Form 1040) to figure your tax if both
of the following are
true.
-
You have a net capital gain or qualified dividends (or both). You have a net capital gain if both lines 16 and 17a of Schedule
D are gains.
Qualified Dividends are explained earlier under Tax Treatment of Distributions.
-
Your taxable income on Form 1040, line 40, is more than zero.
If you have any collectibles gain, gain on qualified small business stock, or unrecaptured section 1250 gain, you may have
to use the Schedule
D Tax Worksheet in the Schedule D instructions to figure your tax. See the directions below line 20 of Schedule D.
Capital Gain Tax Rates
The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower
rates are called the
maximum capital gain rates.
The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than any net short-term capital
loss.
The maximum capital gain rate can be 5%, 8%, 10%, 15%, 20%, 25%, or 28%. See Table 4.
The maximum capital gain rate does not apply if it is higher than your regular tax rate.
Table 4. What Is Your Maximum Capital Gain Rate?
IF your net capital gain is from ... |
THEN your maximum capital gain rate is ... |
collectibles gain |
28% |
gain on qualified small business stock equal to the section 1202 exclusion |
28% |
unrecaptured section 1250 gain |
25% |
other gain,
1 and the regular tax rate that would apply is 25% or higher
|
20% for sales
2 before May 6, 2003
|
15% for sales
2 after May 5, 2003
|
Other gain,
1 and the regular tax rate that would apply is lower than 25%
|
8%3or 10% for sales
2 before May 6, 2003
|
5% for sales
2 after May 5, 2003
|
1“Other gain” means any gain that is not collectibles gain, gain on qualified small business stock, or unrecaptured section 1250
gain.
|
2 The term “sales” includes trades, involuntary conversions, and installment payments received.
|
3 The rate is 8% only for qualified 5-year gain (long-term capital gain from the sale of property you held for more than 5
years and sold
before May 6, 2003).
|
Example.
You have a capital gain distribution that is a section 1202 gain, so the maximum capital gain rate on the distribution would
be 28%. Because you
are single and your taxable income is $25,000, none of your taxable income will be taxed above the 15% rate. The 28% rate
does not apply.
Limit on Capital Loss Deduction
If line 17a of Part III, Schedule D (Form 1040) shows a loss, your allowable capital loss deduction is the smaller of:
-
$3,000 ($1,500 if you are married and filing a separate return), or
-
Your total net loss shown on line 17a of Schedule D.
Enter your allowable loss on line 13a of Form 1040.
Example.
Bob and Gloria sold all of their shares in a mutual fund. The sale resulted in a capital loss of $7,000. They had no other
capital transactions.
Their taxable income was $26,000. On their joint 2003 return, they can deduct $3,000. The unused part of the loss, $4,000
($7,000 – $3,000), can
be carried over to 2004.
If Bob and Gloria's capital loss had been $2,000, their capital loss deduction would have been $2,000. They would have no
carryover.
Capital loss carryover.
If you have a total net loss on line 17a of Schedule D that is more than the yearly limit on capital loss deductions,
you can carry over the unused
part to next year and treat it as if you had incurred it in that next year. To determine your capital loss carryover, subtract
from your total net
loss the lesser of:
-
Your allowable capital loss deduction for the year, or
-
Your taxable income increased by your allowable capital loss deduction for the year and by your deduction for personal
exemptions.
If your deductions exceed your gross income, you start the computation in (2) above with a negative number.
Use the Capital Loss Carryover Worksheet in Publication 550 to figure your capital loss carryover.
When carried over, the loss will keep its original character as long-term or short-term. Therefore, a long-term capital
loss carried over from a
previous year will offset long-term gains of the current year before it offsets short-term gains of the current year. For
more information on figuring
capital loss carryovers, get Publication 550.
Separate returns.
Capital loss carryovers from separate returns are combined if you now file a joint return. However, if you once filed
jointly and are now filing
separately, a capital loss carryover from the joint return can be deducted only on the separate return of the spouse who actually
had the loss.
Investment Expenses
You can generally deduct the expenses of producing taxable investment income. These include expenses for investment counseling
and advice, legal
and accounting fees, and investment newsletters. These expenses are deductible as miscellaneous itemized deductions to the
extent that they exceed 2%
of your adjusted gross income. See chapter 3 in Publication 550 for more information.
Interest paid on money to buy or carry investment property is also deductible, but the deduction may be limited. See Limit on Investment
Interest Expense, later.
Publicly offered mutual funds.
Most mutual funds are publicly offered. Expenses of publicly offered mutual funds are not treated as miscellaneous
itemized deductions. This is
because these mutual funds report only the net amount of investment income after your share of the investment expenses has
been deducted.
Nonpublicly offered mutual funds.
If you own shares in a nonpublicly offered mutual fund during the year, you can deduct your share of the investment
expenses on your Schedule A
(Form 1040). Claim them as a miscellaneous itemized deduction to the extent your miscellaneous itemized deductions exceed
2% of your adjusted gross
income. Your share of the expenses will be shown in box 5 of Form 1099–DIV. A nonpublicly offered mutual fund is one that:
-
Is not continuously offered pursuant to a public offering,
-
Is not regularly traded on an established securities market, and
-
Is held by fewer than 500 persons at any time during the tax year.
Contact your mutual fund if you are not sure whether it is nonpublicly offered.
Expenses allocable to exempt-interest dividends.
You cannot deduct expenses that are for the collection or production of exempt- interest dividends. Expenses must
be allocated if they were for
both taxable and tax-exempt income. One accepted method for allocating expenses is to divide them in the same proportion that
each type of income from
the mutual fund is to your total income from the fund. To find the part of the expenses that relates to the tax-exempt income,
you must first divide
your tax- exempt income by your total income. Then multiply your expenses by the result. You cannot deduct this part.
Example.
William received $600 in dividends from his mutual fund: exempt-interest dividends of $480 and taxable dividends of $120.
In earning this income,
he had a $50 expense for a newsletter on mutual funds. William divides the exempt-interest dividends by the total dividends
to figure the part of the
expense that is not deductible. Therefore, 80% ($480 ÷ $600) of William's expense is for exempt-interest income. He cannot
deduct $40 (80% of
$50) of the expense. William may claim the balance of the expense, $10, as a miscellaneous itemized deduction subject to the
2%-of-adjusted-gross-
income limit. That is the part of the expense allocable to the taxable dividends.
Limit on Investment
Interest Expense
The amount you can deduct as investment interest expense may be limited in two different ways. First, you may not deduct the
interest on money you
borrow to buy or carry shares in a mutual fund that distributes only exempt-interest dividends. If the fund also distributes
taxable dividends, you
must allocate the interest between the taxable and nontaxable income. Allocate the interest as explained under Expenses allocable to
exempt-interest dividends, earlier.
Second, your deduction for investment interest expense is limited to the amount of your net investment income.
Net investment income.
This is figured by subtracting your investment expenses other than interest from your investment income. For this
purpose, do not include any
income or expenses taken into account to figure gain or loss from passive activities. For more information on passive activity
losses, get Publication
925, Passive Activity and At-Risk Rules.
Investment income.
Investment income generally includes gross income derived from property held for investment (such as interest, dividends,
annuities, and
royalties). It generally does not include net capital gain derived from disposing of investment property. Nor does it include
qualified dividends or
capital gain distributions from mutual fund shares. However, you can choose to include part or all of these amounts in investment
income. For
information on this choice, see chapter 3 of Publication 550.
Investment expenses.
Investment expenses include all income-producing expenses relating to the investment property, other than interest
expenses, that are allowable
deductions after subtracting 2% of adjusted gross income. In figuring the amount over the 2% limit, miscellaneous expenses
that are not investment
expenses are disallowed before any investment expenses are disallowed.
For information on the 2% limit, get Publication 529, Miscellaneous Deductions.
Example.
Jane, a single taxpayer, has investment income for the year of $12,000. Jane's investment expenses (other than interest expense)
directly connected
with the production of income were $980 after subtracting the 2% limit on miscellaneous itemized deductions. Jane incurred
$12,500 of investment
interest expense during the year. She had no passive activity losses. Jane figures net investment income and the limit on
her investment interest
expense deduction as follows:
For the year, Jane's investment interest expense deduction is limited to $11,020 (her net investment income). The disallowed
interest expense of
$1,480 ($12,500 - $11,020) can be carried forward to the following year as explained next under Carryover.
Carryover.
You can carry forward to the next tax year the investment interest that you cannot deduct because of the limit. You can deduct the
interest carried forward to the extent that your net investment income exceeds your investment interest in that later year.
Form 4952.
Use Form 4952 to figure your investment interest expense deduction. For more information about investment interest
expense, get Publication 550.
Comprehensive
Example
Robert and Janice Martin have the following four sources of investment income to report on their 2003 tax return. Their Schedule
D (Form 1040) is
shown later.
-
$1,204 gain from the sale of 200 shares of Mutual Fund S on October 8, 2003. They received Form 1099–B, and they report the
sale on
Schedule D (Form 1040).
Robert and Janice purchased these shares in 1989 at $10 each. They received some return of capital distributions in 1991,
1992, and 2000 that
reduced their basis in the shares. In 2001 and 2002, the Martins reported undistributed capital gains that increased their
basis in their shares. They
received no distributions in 2003 before the sale.
-
$265 of ordinary dividends, including $250 of qualified dividends, and $61 of capital gain distributions from Mutual Fund
R. The capital
gain distributions include $31 of post-May 5 distributions and $30 of qualified 5-year gain. The Martins received Form 1099–DIV
showing these
amounts. They report the ordinary dividends on line 9a of Form 1040. They report the qualified dividends on line 9b of Form
1040. They do not report
the ordinary dividends on Schedule B (Form 1040) because their total ordinary dividends were not over $1,500. They report
the capital gain
distributions on Schedule D (Form 1040) because they have other capital transactions. They complete the Qualified 5-Year Gain Worksheet in
the instructions for Schedule D.
Robert and Janice invested $3,800 in this fund in June 2003 and received 153.16 shares that cost $24.81 per share. They requested
that all of their
distributions be reinvested in more shares of the fund. On December 26, 2003, they acquired an additional 13.03 shares at
$25.01 per share from their
reinvested dividends.
-
$101 of exempt-interest dividends from Mutual Fund X. They receive a statement from the fund, and they report this nontaxable
amount on line
8b of Form 1040.
The Martins invested $2,600 in this fund in April 2001 and received 87.54 shares at $29.70 per share. They received exempt-
interest dividends of
$92 in 2001 and $107 in 2002.
-
$237 in ordinary dividends, including $220 of qualified dividends, from 100 shares of common stock in Green Publishing Company.
They
received Form 1099–DIV, and they report the ordinary dividends on line 9a of Form 1040 and the qualified dividends on line
9b.
Robert and Janice bought this stock in 1989 for $10.29 per share.
Mutual Fund Record.
Robert and Janice keep track of all their basis adjustments on their Mutual Fund Record, shown later. They show the return of capital
distributions and the undistributed capital gains from Mutual Fund S and the reinvested dividends from Mutual Fund R. They
do not show the
exempt-interest dividends from Mutual Fund X because those dividends do not change their basis in the shares.
The Martins keep this record with their mutual fund documents, and they use it to report their 2003 sale of Mutual
Fund S.
Preparing Schedule D.
The Martins use their Form 1099–B and their Mutual Fund Record to figure the gain from the sale of Mutual Fund S to report on
Schedule D.
Robert and Janice enter the $61 capital gain distribution from Mutual Fund R (from box 2a of Form 1099–DIV) on line
13, column (f). They
enter the $31 post-May 5 capital gain distribution (from box 2b of Form 1099–DIV) in column (g) of line 13.
They enter the $30 qualified 5-year gain (from box 2c of Form 1099–DIV) on line 5 of the Qualified 5-Year Gain Worksheet in the
instructions for Schedule D. This is their only qualified 5-year gain, so they also enter $30 on lines 6 and 8 of the worksheet
and on line 35 of
Schedule D.
They report the sale of their shares in Mutual Fund S on line 8 because they owned the shares for more than 1 year.
They use the information from
their Mutual Fund Record to complete columns (a), (b), and (e). After adjustment for their return of capital distributions and their
undistributed capital gains, their basis is $1,996 ($9.98 per share). They use their Form 1099–B to complete columns (c) and
(d). Their sales
price in column (d) (the gross proceeds shown in box 2 of Form 1099–B) is $3,200 ($16 per share). They enter their gain of
$1,204 in column (f).
They also enter it in column (g) because they sold the shares after May 5.
Robert and Janice add the amounts in column (f) of lines 8 and 13 and enter their net long-term capital gain of $1,265
on line 16. They also enter
that amount on line 17a. They add the amounts in column (g) of lines 8 and 13 and enter the result, $1,235, on lines 15 and
17b. Because lines 16 and
17a are gains, they compute their tax using Part IV of Schedule D. They enter their qualified dividends of $470 ($250 from
Mutual Fund R and $220 from
Green Publishing Co.) on line 23 of Part IV. (Part IV is shown, but not filled in, except line 23 for qualified dividends
and line 35 for qualified
5-year gain.)
Table 5. Mutual Fund Record for Robert and Janice Martin
Mutual Fund |
Acquired
1 |
Adjustment to Basis Per Share |
Adjusted
2 Basis Per Share
|
Sold or Redeemed |
Date |
Number of Shares |
Cost Per Share |
Date |
Number of Shares |
MUTUAL FUND S |
7-12-89 |
200 |
10.00 |
12-31-91 |
12-31-92 |
12-31-00 |
12-31-01 |
8-31-02 |
9.98 |
10-8-03 |
200 |
(.05) |
(.02) |
(.04) |
.03 |
.06 |
|
|
|
|
|
|
|
|
|
|
|
|
MUTUAL FUND X |
4-19-01 |
87.54 |
29.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MUTUAL FUND R |
6-6-03 |
153.16 |
24.81 |
|
|
|
|
|
|
|
|
|
12-26-03 |
13.03 |
25.01 |
|
|
|
|
|
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1 Include share received from reinvestment of distributions.
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2 Cost plus or minus adjustments.
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Qualified 5-Year Gain Worksheet—Line 35Keep for your Records
1. |
Enter the total of all gains that you reported on line 8, column (f), of Schedules D
and D-1 from property held more than 5 years and disposed of before May 6, 2003. Do not reduce these gains by any losses
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1. |
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2. |
Enter the total of all gains from property held more than 5 years and disposed of
before May 6, 2003, from Form 4797, Part I, but only if Form 4797, line 7, column (g), is more than zero. Do not reduce these
gains by any losses
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2. |
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3. |
Enter the total of all capital gains from property held more than 5 years and
disposed of before May 6, 2003, from Form 4684, line 4, but only if Form 4684, line 15, is more than zero. Do not reduce these
gains by any losses
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3. |
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4. |
Enter the total of all capital gains from property held more than 5 years and
disposed of before May 6, 2003, from Form 6252; Form 6781, Part II; and Form 8824. Do not reduce these gains by any losses
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4. |
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5. |
Enter the total of any qualified 5-year gain reported to you on:
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Form 1099-DIV, box 2c;
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Form 2439, box 1c; and
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Schedule K-1 from a partnership, S corporation, estate, or trust (do not
include gains from section 1231 property; take them into account on line 2
above, but only if Form 4797, line 7, column (g), is more than zero).
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5. |
30.00 |
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6. |
Add lines 1 through 5 |
6. |
30.00 |
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7. |
Enter the part, if any, of the gain on line 6 that is:
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Attributable to 28% rate gain or
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Included on line 6, 10, 11, or 12 of the Unrecaptured Section
1250 Gain Worksheet on page D-7.
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7. |
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8. |
Qualified 5-year gain. Subtract line 7 from line 6. Enter the result here
and on Schedule D, line 35
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8. |
30.00 |
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How To Get Tax Help
You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information
from the IRS in several
ways. By selecting the method that is best for you, you will have quick and easy access to tax help.
Contacting your Taxpayer Advocate.
If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.
The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights
and resolving problems that
have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision,
they can clear up
problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.
To contact your Taxpayer Advocate:
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Call the Taxpayer Advocate toll free at
1–877–777–4778.
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Call, write, or fax the Taxpayer Advocate office in your area.
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Call 1–800–829–4059 if you are a
TTY/TDD user.
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Visit the web site at
www.irs.gov/advocate.
For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.
Free tax services.
To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications
and an index of tax topics. It also describes other free tax information services, including tax education and assistance
programs and a list of
TeleTax topics.
Internet.
You can access the IRS web site 24 hours a day, 7 days a week at
www.irs.gov to:
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E-file. Access commercial tax preparation and e-file services available for free to eligible taxpayers.
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Check the amount of advance child tax credit payments you received in 2003.
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Check the status of your 2003 refund. Click on “Where's My Refund” and then on “Go Get My Refund Status.” Be sure to wait at least
6 weeks from the date you filed your return (3 weeks if you filed electronically) and have your 2003 tax return available
because you will need to
know your filing status and the exact whole dollar amount of your refund.
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Download forms, instructions, and publications.
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Order IRS products on-line.
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See answers to frequently asked tax questions.
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Search publications on-line by topic or keyword.
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Figure your withholding allowances using our Form W-4 calculator.
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Send us comments or request help by e-mail.
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Sign up to receive local and national tax news by e-mail.
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Get information on starting and operating a small business.
You can also reach us using File Transfer Protocol at
ftp.irs.gov.
Fax. You can get over 100 of the most requested forms and instructions 24 hours a day, 7 days a week, by fax. Just call
703–368–9694 from your fax machine. Follow the directions from the prompts. When you order forms, enter the catalog number for
the form you need. The items you request will be faxed to you.
For help with transmission problems, call 703–487–4608.
Long-distance charges may apply.
Phone. Many services are available by phone.
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Ordering forms, instructions, and publications. Call 1–800–829–3676 to order current–year
forms, instructions, and publications and prior year forms and instructions. You should receive your order within 10 days.
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Asking tax questions. Call the IRS with your tax questions at 1–800–829–1040.
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Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An
employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local
Taxpayer Assistance Center
for an appointment. To find the number, go to www.irs.gov or look in the phone book under “United States Government, Internal Revenue
Service.”
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TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1–800–829– 4059 to ask tax or
account questions or to order forms and publications.
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TeleTax topics. Call 1–800–829–4477 to listen to pre-recorded messages covering various tax
topics.
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Refund information. If you would like to check the status of your 2003 refund, call 1–800–829 4477 for
automated refund information and follow the recorded instructions or call 1–800–829–1954. Be sure to wait at least 6
weeks from the date you filed your return (3 weeks if you filed electronically) and have your 2003 tax return available because
you will need to know
your filing status and the exact whole dollar amount of your refund.
Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers,
we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to
sometimes listen in on or
record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.
Walk-in. Many products and services are available on a walk-in basis.
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Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and
publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions,
and office supply stores
have a collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices
and libraries have the
Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes
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Services. You can walk in to your local Taxpayer Assistance Center every business day to ask tax questions or get help with a tax
problem. An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. You
can set up an appointment by
calling your local Center and, at the prompt, leaving a message requesting Everyday Tax Solutions help. A representative will
call you back within 2
business days to schedule an in-person appointment at your convenience. To find the number, go to
www.irs.gov or look in the phone book under “United States Government, Internal Revenue
Service.”
Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a
response
within 10 workdays after your request is received. Use the address that applies to your part of the country.
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Western part of U.S.:
Western Area Distribution Center
Rancho Cordova, CA 95743–0001
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Central part of U.S.:
Central Area Distribution Center
P.O. Box 8903
Bloomington, IL 61702–8903
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Eastern part of U.S. and foreign addresses:
Eastern Area Distribution Center
P.O. Box 85074
Richmond, VA 23261–5074
CD-ROM for tax products. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and obtain:
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Current-year forms, instructions, and publications.
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Prior-year forms and instructions.
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Frequently requested tax forms that may be filled in electronically, printed out for submission, and saved for recordkeeping.
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Internal Revenue Bulletins.
Buy the CD-ROM from National Technical Information Service (NTIS) on the Internet at
www.irs.gov/cdorders for $22 (no handling fee) or call
1–877–233–6767 toll free to buy the CD-ROM for $22 (plus a $5 handling fee). The first release is available in early
January and the final release is available in late February.
CD-ROM for small businesses. IRS Publication 3207, Small Business Resource Guide, is a must for every small business owner or
any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions and publications
needed to
successfully manage a business. In addition, the CD provides an abundance of other helpful information, such as how to prepare
a business plan,
finding financing for your business, and much more. The design of the CD makes finding information easy and quick and incorporates
file formats and
browsers that can be run on virtually any desktop or laptop computer.
It is available in early April. You can get a free copy by calling 1–800–829–3676 or by visiting the web site at
www.irs.gov/smallbiz.
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