2006 Reporting of Mutual Fund Distributions and Sale/Redemption of Fund Shares

Transcription

1 2006 Reporting of Mutual Fund Distributions and Sale/Redemption of Fund Shares Tax preparation assistance: How to use Forms 1099-DIV and 1099-B when you file your tax return

2 This brochure explains how to report information from the enclosed Forms 1099-DIV and 1099-B on your tax return (Form 1040 or 1040A). How to Use Form 1099-DIV Dividends and Capital Gain Distributions From Taxable Mutual Fund Accounts Schedule B (Interest and Ordinary Dividends) If the total of all the ordinary dividends (Box 1a) received in 2006 from all your investments is more than $1,500, you must list each source of your ordinary dividend income on Schedule B (Form 1040) or Schedule 1 (Form 1040A). If the total of all ordinary dividends received in 2006 from all your investments is $1,500 or less, you report it on Line 9a of Form 1040 or Form 1040A. Schedule D (Capital Gains and Losses) You must report total capital gain distributions (Box 2a) from mutual funds on Schedule D, unless both of the following exceptions apply: 1. The only amounts you have to report on Schedule D are capital gain distributions from Box 2a of your Forms 1099-DIV. 2. None of your Forms 1099-DIV have an amount in Box 2b (Unrecaptured Section 1250 Gain), Box 2c (Section 1202 Gain) and Box 2d (Collectibles [28%] Gain). If you are not required to file Schedule D, enter your total capital gain distributions (Box 2a) from all your investments on Line 13 of Form 1040 and check the box on that line or enter them on Line 10 of Form 1040A. You also must complete a Qualified Dividends and Capital Gains Tax Worksheet included in the Form 1040 or 1040A instructions to determine your tax due on these amounts. Notes: REIT Index Fund Form 1099-DIV Mailed in February Shareholders of Vanguard REIT Index Fund should take note not to file their federal or state income tax returns until they receive their Form 1099-DIV from Vanguard REIT Index Fund, which Vanguard mails (with IRS approval) in February. REITs generally cannot calculate their taxable earnings until after the end of the tax year, which is usually the calendar year. For this reason, Vanguard seeks an extension from the IRS each year to mail completed Forms DIV for the REIT Index Fund after the normal deadline of January 31. Filing your tax returns prior to receiving the Form 1099-DIV for REIT Index Fund will require filing amended returns, and may result in the payment of additional taxes. Vanguard Brokerage Services Form 1099 If you have a Vanguard Brokerage Service account, a separate Form 1099 will be mailed to you by January 31st. Revised tax forms may be issued if income amounts from your brokerage securities are reclassified by the issuer. How to Use Form 1099-B Capital Gains or Losses From the Sale/Redemption of Mutual Fund Shares If you sold Vanguard mutual fund shares during 2006, you may have realized a capital gain or loss that must be reported on Schedule D. The gross proceeds from that sale will be reported to you on Form 1099-B, along with instructions on how to calculate and report the gain or loss on Schedule D of Form 1040.* Net long-term capital gains realized from the sale of mutual fund shares are subject to a tax rate of 15% (5% for lower income tax brackets). Note, however, that net *Shareholders in money market funds generally will not realize a capital gain or loss and will not receive a Form 1099-B. short-term capital gains realized from the sale of mutual fund shares held for one year or less are taxed at ordinary income rates. Form 1099-B lists only your account redemptions and the gross proceeds for each sale of fund shares. To complete Schedule D, you must report your gross proceeds as well as cost basis, holding period for the shares sold, and gain or loss. Separate from Form 1099-B, Vanguard provides an Average Cost Summary Statement that includes (in most cases) the capital gain or loss information you need to complete Schedule D. Vanguard uses the Average Cost Single Category Method to arrive at an average cost for all fund shares held in your account up to and including the redemption date. While this is a commonly used, IRS-approved method for calculating the cost of shares redeemed, you can choose other calculation methods that may be more beneficial or appropriate for you. For more information on tax reporting and calculating tax cost basis, see IRS Publication 564, Mutual Fund Distributions, at the IRS website ( or consult with a tax professional for additional guidance. New Reporting Requirement for Tax-Exempt Interest Dividends If you received any tax-exempt interest dividends in 2006, Vanguard will report this amount on IRS Form 1099-INT. Tax-exempt interest dividends paid after December 31, 2005, must now be reported on Form 1099-INT as required by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) which was enacted into law on May 17, Refer to Vanguard s update entitled Reporting of 2006 Tax-Exempt Interest Dividends on Form 1099-INT for information on reporting tax-exempt interest dividends on your tax return.

3 More Information on Using Form 1099-DIV What Are Qualified Dividends? Distributions from U.S. corporations and certain foreign corporations are eligible for reduced tax rates as qualified dividends. Mutual funds may distribute qualified dividend income (QDI) to shareholders. Equity and balanced funds are likely to distribute QDI; money market and bond funds will not distribute QDI and therefore are not eligible for lower tax rates. Box 1a (Total Ordinary Dividends) Box 1a shows total ordinary dividends, including short-term capital gain distributions by fund from your taxable Vanguard mutual fund accounts. Box 1b (Qualified Dividends) Box 1b shows the portion of the amount in Box 1a (Total Ordinary Dividends) that is QDI-eligible for the reduced 15% or 5% tax rate. To claim the reduced tax rate for QDI reported in Box 1b, you must have held your fund shares for at least 61 days during the 121-day period beginning 60 days prior to the ex-dividend date. (Also known as the reinvest date, the ex-dividend date is when the fund s net asset value is adjusted to account for distributions.) Your personal QDI is the QDI reported to you in Box 1b, reduced, if necessary, by dividends for which you did not meet the holding period requirement. For example, if a fund s ex-dividend date was 6/20/2006, shares would have to have been held for at least 61 days between 4/21/2006 and 8/19/2006 to qualify as QDI for that distribution. If the shares do not meet the holding period requirement, dividends paid on those shares do not qualify for the lower tax rates. For help in determining your personal QDI, visit the Tax Center on Vanguard.com to use the Vanguard Qualified Dividend Income Tax Tool, which can calculate qualified dividend income generated by your taxable Vanguard mutual fund shares. In addition, Vanguard will mail a Personal QDI Statement to shareholders who may not be eligible to report the entire amount shown in Box 1b of their Form 1099-DIV as QDI because certain shares do not meet the holding period requirements. Reporting Mutual Fund Distributions Personal QDI statements will be mailed near the end of February 2007, after the expiration of the 61-day holding period for dividends paid by all Vanguard funds during If you wish to determine your personal QDI for 2006 prior to receiving your statement, consider waiting until after the 61-day holding period has passed to ensure that all dividends reported in Box 1b of all Forms 1099-DIV are eligible for the reduced tax rates. Box 2a (Total Capital Gain Distributions) Box 2a shows the long-term capital gain distributions by fund from your taxable Vanguard mutual fund accounts. Schedule B (Form 1040) Schedule D (Form 1040) In this example, the investor is required to file Schedule D and has received the following distributions from the XYZ Fund: $4, in ordinary dividends, as shown in Box 1a (Total Ordinary Dividends). The investor reports amounts shown in Box 1a on all Forms 1099-DIV from all sources separately, by fund, on Line 5 of Schedule B (Form 1040). Form 1040 $2, in QDI, as shown in Box 1b (Qualified Dividends). The investor reports the sum of all QDI shown in Box 1b on all Forms 1099-DIV on Line 9b of Form 1040 or Form 1040A, assuming that the investor meets the QDI holding period requirement, as described above. $2, in long-term capital gains, as shown in Box 2a (Total Capital Gain Distributions). The investor reports the sum of all long-term capital gain distributions from all sources on Line 13 of Schedule D. The graphics used in this brochure are for illustration only. The information they contain is not meant to reflect the fund performance, the investments, or the activity in any account. Additionally, the reporting for capital gain distributions assumes that Schedule D is required.

4 For additional help, visit the Tax Center at Vanguard.com. The Tax Center is your one-stop source for Vanguard tax-related information, forms, and links to handy calculators such as our Qualified Dividend Income Tax Tool.

5 P.O. Box 2600 Valley Forge, PA Connect with Vanguard > > Refer to the phone number on your statement 2006 The Vanguard Group, Inc. All rights reserved. Vanguard, ship logo and connect with Vanguard are trademarks of The Vanguard Group. BCGB