IRS Publication 564: Mutual Fund Distributions is an Internal Revenue Service publication that provides information on the ways mutual funds and money market funds are taxed.
IRS Publication 564: Mutual Fund Distributions provides information to shareholders of mutual funds, money market funds and other regulated investments regarding the tax obligations for these instruments.
The information described in Publication 564 includes definitions of the types of investments this publication covers, associated forms and publications and detailed information on how to report gains or losses in the shareholder’s annual tax reporting.
In most cases, the rules in Publication 564 do not apply to mutual fund shares in qualified retirement plans such as IRAs or 401(k) plans.
At the end of the tax year, the mutual fund will send an annual statement, in most cases a form 1099-DIV, which describes the amount and type of distribution the shareholder received that year.
Shareholders can receive distributions from their mutual funds in many forms, including ordinary dividends, qualified dividends, capital gains distributions, exempt-interest dividends and nondividend distributions. Each type of distribution has different reporting requirements and are taxed in different ways. Publication 564 details these differences, and investors can find additional relevant information in Publication 550: Investment Income and Expenses.
Most mutual funds allow automatic reinvestment of distributions, as opposed to cash payouts to shareholders, although under most circumstances these reinvestment amounts must be reported in tax filings as if the shareholder had received cash.
Ordinary dividends, the most common type of dividend paid out by mutual funds, are simple distributions of a fund based on its earnings and profits. In many cases, ordinary dividends will also be classified as qualified dividends. Qualified dividends are taxed at the same tax rates as net capital gain.
Capital gain distributions are paid by mutual funds from net realized long-term capital gains. These distributions are taxed as long-term capital gains regardless of the length of time a shareholder has owned those shares. Some mutual funds may pay taxes on undistributed gains and will report this to shareholders who can in turn take credit for their share of tax paid on those gains.
Exempt-interest dividends are paid in cases where the mutual fund has implemented a tax-exempt interest plan for its investors. In such cases, any dividends are not taxable, but they may still need to be included in annual tax filings.
Nondividend distributions are returns of capital investments and are not paid out of fund earnings or profits. A nondividend distribution reduces a shareholders basis in the shares held in that mutual fund.