How do I report this 1099-DIV from my mutual fund?

Enter the ordinary dividends from Form 1099-DIV (PDF), box 1a, on line 9a of Form 1040 (PDF), U.S. Individual Income Tax Return. Enter any qualified dividends from Form 1099-DIV, box 1b, on line 9b of Form 1040. Enter the total capital gain distributions from box 2a on line 13, column (f) of Form 1040, Schedule D (PDF). Enter the 28% rate gain portion of your capital gain distributions from box 2b on line 13, column (g) of Schedule D. If you have an amount in box 2c or box 2d, refer to Instructions for Form 1040, Schedule D. Nontaxable distributions, box 3, that are return of capital distributions, reduce your cost basis and are not taxable until your basis is reduced to zero. If no amount is shown in boxes 2b through 2d, and your only capital gains and losses are capital gain distributions, refer to Instructions for Form 1040 for line 13.

I received a Form 1099-G, for my state tax refund. Do I have to include this amount as income on my return?

If you did not itemize your deductions on your Federal tax return for the same year as the state or local tax refund applies to, do not report any of the refund as income.

If you itemized deductions on your Federal tax return for 2003, and received a refund of state or local taxes in 2004, you may have to include all or part of the refund as income on your 2004 tax return. Report your taxable State or Local Refunds on Form 1040, Line 10. You cannot use Form 1040A or 1040EZ. Refer to Tax Topic 405, Refund of State and Local Taxes , and Publication 525 , Taxable and Nontaxable Income , for further information.

I purchased stock from my employer under an employee stock purchase plan. Now I have received a Form 1099-B from selling it. How do I report this?

If the special holding period requirements are met, generally treat gain or loss from the sale of the stock as capital gain or loss. However, you may have compensation income if:

The holding period requirement is that you must hold the stock for more than 2 years from the time the option is granted to you and for more than 1 year from when the stock was transferred to you. If you do not meet these holding period requirements, there is a disqualifying disposition of the stock. The compensation income that you should report in the year of the disposition is the excess of the fair market value of the stock on the date the stock was transferred to you less the amount paid for the shares.

If the holding period requirement are met, but the option price is below the fair market value of the stock at the time the option was granted, you report the difference as compensation income (wages) when you sell the stock. Generally, this compensation income is the lesser of the excess of the fair market value of the stock on the date of the disposition less the exercise price OR the excess of the fair market value of the stock at the time the option was granted less the exercise price.

If your gain is more than the amount you report as compensation income, the remainder is a capital gain reported on Form 1040, Schedule D (PDF). If you sell the stock for less than the amount you paid for it, your loss is a capital loss, and you do not have ordinary income.

For more information, refer to Publication 525, Taxable and Nontaxable Income, and Publication 551, Basis of Assets.

Should I advise the IRS why amounts reported on Form 1099-B do not agree with my Schedule D for proceeds from short sales of stock not closed by the end of year that I did not include?

If you are able to defer the reporting of gain or loss until the year the short sale closes, the following will allow you to reconcile your Forms 1099-B to your Schedule D and still not recognize the gain or loss from the short sale:

For more on these rules and exceptions that may apply, refer to Chapter 4 of Publication 550, Investment Income and Expenses.

I received a 1099-DIV showing a capital gain. Why do I have to report capital gains from my mutual funds if I never sold any shares?

A mutual fund is a regulated investment company that pools funds of investors allowing them to take advantage of a diversity of investments and professional asset management. You own shares in the fund, but the fund owns assets such as shares of stock, corporate bonds, government obligations, etc. One of the ways the fund makes money for its investors is to sell these assets at a gain. If the asset was held by the mutual fund for more than one year, the nature of the income is capital gain, which gets passed on to you. These are called capital gain distributions, which are distinguished on Form 1099-DIV (PDF) , from income that is from other profits, called ordinary dividends.

Capital gains distribution are taxed as long term capital gains regardless of how long you have owned the shares in the mutual fund. If your capital gains distribution is automatically reinvested, the reinvested amount is the basis of the additional shares purchased.