Tax Time - Question about Tenneesse Dividend Tax

[Aeowyn]

I am a new resident to Tennessee. Tennessee has no income tax and no "capital gains" tax (not completely sure about the latter).

They do have a tax on dividend income but their definition of what is considered dividend income is a little confusing. In the definition of what is taxable it includes "...income from mutual funds including capital gain distributions".

Are there are an Tennessee residents with mutual fund investments out there that can define this a little better?

Does it mean 1099-Div item 1 amounts that include dividend and short term capital gain distributions only? Or does it also include 1099-Div item 2a that documents long term capital gain distributions.

I'm leaning toward just 1099-Div item 1. It makes sense that they since short term capital gain distributions from mutual funds are lumped in with dividends that they would tax them the same.

And I don't think it includes this, but does it include gains realized from the sale of mutual funds reported on 1099-B?

[frayne]

This might help: http://www.tn.gov/revenue/taxguides/indincguide.pdf

Next question how much are you talking about because if your filing status is MFJ, the first $2500 is exempt, single is $1250.

[Aeowyn]

How much depends on what is taxable. If it were just the actual divided distributions from mutual funds, then we would be under the $2500 exclusion. If it is divided + short term gain distributions reported in 1099-DIV, then we are just barely over the exclusion. If it is dividend + short term capital gain + long term capital gain distributions that get reported in 1099-DIV 1a + 2, then I am definitely over. If it happens to include capital gains that I triggered based on the sale of mutual funds in taxable accounts, then I am way over.

The bulk of what is in 1099-DIV is from one fund that at the end of the year paid huge capital gain distributions.

[Aeowyn]

frayne, I've read through the tax guide you linked to before, this is how it words what I'm trying to figure out:

Income from investment trusts and mutual funds, including capital gain distributions and distributions designated as “nontaxable” under federal income tax law, whether in cash or additional stock, is taxable.

Do does TN treat mutual fund capital gain "distributions" different than mutual fund capital gains realized from selling shares? It also doesn't specify if it includes both short term and long term distributions so could be both. But since it is under "dividend income" - I thought it might just be short term dividends since the 1099-DIVs classify short term distributions in with the dividends.

In other words, I could read that as Dividends include short term gain distributions that are included in 1099-DIV box 1a, Divided distributions.

[fisherman]

Tennessee does have the HAL Income tax. The limits above are referring to this tax. Search for HAL Income tax for forms and guidelines for paying it.

Welcome to Tennessee!

[Aeowyn]

For what it is worth - I hired my taxes done this year (for the first year ever) due to the complication factor. The software that the person doing my taxes uses put the 1099-Div 1a and 2a as taxable in TN. The capital gains that I realized from selling mutual funds were not taxable (1099-B).

So it appears that all distributions that get passed from the mutual fund to share holders (dividends and capital gains) are taxable in TN. This is a little inconsistent since if I had owned the stocks in the mutual fund directly and sold in the proportion that the manger of the mutual fund did, I would only have to pay tax on dividends and not the capital gains.