The amount of income tax due on your mutual fund holdings will depend on distributions paid by the funds and whether you sold shares during the year. If you sold no shares, taxes are due only on distributions paid — regardless of whether you received a cash distribution or had the money reinvested. Your fund manager will send you a Form 1099-DIV, which will reflect the types of distributions you earned.
No Shares Sold
1. Determine your marginal income tax bracket. The marginal bracket is the tax rate you pay on the last dollar of income you earned during the year. Look up your taxable income amount from the previous year and look up the tax bracket for that amount for the current year. If your income has increased or you are near the next, higher tax bracket, use the higher rate.
2. Write down the amounts of the following types of distributions according to your mutual fund Form 1099-DIV: Capital gains Total ordinary dividends Qualified dividends
3. Multiply the listed capital gains amount by 15 percent if your marginal tax bracket is 25 percent or higher. If you have a lower tax bracket you will owe no long-term capital gains taxes — zero percent tax rate.
4. Multiply the qualified dividends amount by 15 percent if your marginal tax bracket is 25 percent or higher. If you have a lower tax bracket you will owe no taxes on your qualified dividends.
5. Subtract the amount of qualified dividends from the listed amount of total ordinary dividends. This amount will be your non-qualified dividends and short-term capital gains distributions. Multiply the result times your marginal income tax bracket. This result plus the capital gains and qualified dividends tax amounts will be your total mutual fund taxes.
If You Sold Mutual Fund Shares
1. Calculate the taxes due on your mutual fund dividends using the steps above.
2. Obtain your average cost-per-share basis from your mutual fund company. Most mutual fund companies will provide average cost basis for your mutual fund accounts.
3. Determine if the number of shares sold produced long-term or short-term capital gains. Shares held for longer than one year will be long-term holdings. You may have both long-term and short-term shares and resulting gains.
4. Multiply the number of long-term shares sold by both the average cost basis and the price per share received when the shares were sold. The difference between the money received from selling the shares and the cost basis is your long-term capital gain. Repeat the process for the short-term shares sold.
5. Multiply the long-term gain amount by 15 percent if you are in a tax bracket of 25 percent or higher. The result is your long-term capital gains tax. If you are in a lower tax bracket, your long-term gains tax will be zero.
6. Multiply the short-term gains amount by your marginal tax bracket. This amount plus the calculated long-term gains amount plus the taxes on the fund distributions will be your mutual fund taxes due for the year.
- Starting in 2012, mutual fund companies are required to put average cost basis information on the Form 1099-DIV if fund shares were sold.
- If you have not yet received your Form 1099-DIV, you may estimate your tax amounts using the information provided on your year-end mutual fund statement.
- If you sold mutual fund shares for a loss, you will have capital losses, which may be used to reduce your taxable gains or other income.
- Tax rules and rates discussed here are accurate as of the date of publication.