Taxes on dividends

[scrabbler1]

One other item to keep in mind - if a fund has short-term capital gains, then those distributions are treated as non-qualified dividends, and fully taxable at your marginal income tax rate.

Because a mutual fund's short-term cap gain distributions are classified as ordinary dividends for tax purposes, they cannot be offset by capital losses arising from the sale of other assets including from your sales of shares of that same fund ("Tax Loss Harvesting"). This is unlike long-term cap gain distributions which can be offset by losses.

Back in 2010 I had a huge short-term cap gains distribution from a bond fund I own. It was actually 3% of the bond fund's NAV which is a pretty large percentage. I owned a lot of shares in that bond fund so I got hit with a big tax bill I could not TLH to reduce.

Fidelity always reports in its 1099-DIV form how much it paid out in ordinary dividends, qualified dividends (including short-term cap gain distributions), and (long-term) cap gain distributions. I also get a 1099 form which shows how much tax-free interest I receive.

One more thing about cap gian distributions I discovered back in 2003 when the market began zooming upward after its downturn in 2001-2002: Buried deep within the fund's annual statement it shows how much the fund held in capital loss carryovers. The fund uses these losses to offset capital gains so in 2003 while the NAVs were rising quickly the fund made no cap gain distributions because it used the capital loss carryovers to offset any cap gain distributions it would have made otherwise. It also kept the cap gain distributions low in 2004 but by then it had exhausted them all so we began receiving those distributions again.

 

[audreyh1]

Yeah, that's a downside of the tax treatment for mutual funds - don't know why they don't treat them as short-term gains on the schedule D instead of lumping them in with dividends.

 

[audreyh1]

Wellesley usually pays out cap gains once per year and categorizes them as long term and short term.

Not saying that they don't report some short term gains as non-qualified dividends, I just don't know.

It's the ultimate 1099/Sched B that determines how it falls out on the Schedule D and for some reason mutual fund short-term gains distributions are re-characterized as dividends there, which stinks if you have some short-term losses to use against them.

 

[Alan]

It's the ultimate 1099/Sched B that determines how it falls out on the Schedule D and for some reason mutual fund short-term gains distributions are re-characterized as dividends there, which stinks if you have some short-term losses to use against them.

Thanks.