2008 Tax Guide (8.56MB)

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A. Total Ordinary Dividends (Box 1a) Ordinary dividends, which include any net short-term capital gains from a mutual fund, are fully taxable. Ordinary dividends paid by corporations, mutual funds, and certain UITs are included in this section of your Tax Information Statement. Subtotals for U.S. and foreign source ordinary dividends are included at the end of this section. For mutual funds and UITs, foreign income includes any distribution that is comprised in whole or in part of foreign-sourced ordinary dividends. Report total ordinary dividends on IRS Form 1040, line 9a, or IRS Form 1040A. Also report it on IRS Form 1040, Schedule B (Interest and Ordinary Dividends), line 5, if required. See the instructions for IRS Form 1040, Schedule B, to determine if you are required to complete Schedule B to report your dividends.   B. QUALIFIED DIVIDENDS (BOX 1b) The portion of your dividends that is eligible for the 15% or (0%) capital gains rate is reported as Qualified Dividends in Box 1b in this section of your Tax Information Statement. You should report the eligible amount on IRS Form 1040, line 9b. If you have qualified dividends, you must figure your tax by completing the Qualified Dividends and Capital Gains Tax Worksheet in the IRS Form 1040 or 1040A instructions, or the Schedule D Tax Worksheet in the Schedule D instructions, whichever applies. Exception: Some dividends that we report as Qualified Dividends in Box 1b, may not be Qualified Dividends depending on your circumstances. For instance: You must hold the stock or mutual fund shares for a minimum number of days or the dividends will not qualify for the reduced rate. Dividends on stock that you owned for less than 61 days in the 121-day period surrounding the ex-dividend date are not qualified dividends. The 121-day period begins 60 days before the ex-dividend date. When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. The ex-dividend date is the first date following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment. For dividends on preferred stock, where the dividend is attributable to periods totaling more than 366 days, the stock must be held at least 91 days in the 181 days surrounding the ex-dividend date. If you are obligated to make payments under a short sale, dividends on the stock you sold short (or substantially similar stock) are not considered qualified dividends. Substitute payments are not qualified dividends. Substitute payments are the payments you receive when your stock is on loan over the stock’s ex-dividend date. Your shares could be loaned out if you borrow to buy stock on margin. Substitute payments are separately reported to you on IRS Form 1099-MISC.   FOREIGN DIVIDENDS: Foreign dividends are considered qualified dividends when they are paid by a foreign corporation that is either: (1) incorporated in a U.S. possession; (2) eligible for the benefits of a comprehensive income tax treaty with the U.S. that the Treasury Department has determined is satisfactory for this purpose; or (3) readily tradable on an established securities market in the U.S. (such as the New York Stock Exchange® or the NASDAQ® stock market). However, dividends paid by passive foreign investment companies are not considered qualified dividends.

MONEY MARKET AND BOND FUNDS: Dividends paid on money market and bond funds are nonqualified dividends. As such, these dividends are reported in Box 1a, but not Box 1b, in this section of your Tax Information Statement. For more information about determining if your dividends qualify for the 15% rate, please see the instructions to IRS Form 1040 or IRS Publication 550.   C. NONDIVIDEND Distributions (Box 3) Certain payments represent nondividend distributions, since they are a return of capital. You should reduce your cost (or other basis) by the amount of the nontaxable distribution for the purposes of calculating the gain or loss when the security is sold. Once you have received an amount equal to your cost (or other basis) for the security, further distributions are taxable as capital gain. Please review your dividends carefully to determine if any dividends received represent a return of capital.   D. Federal Income Tax Withheld (Box 4) Report federal income tax withheld (backup withholding) as a payment on IRS Form 1040, line 62. Federal income tax withheld is 28% of the dividend distribution (including short-term capital gains, long-term capital gains, and redemptions). Refer to page 4 for additional information.   E. Investment Expenses (Box 5) Your share of a UIT’s expenses is reported in Box 5. You may deduct these expenses on the "Other expenses" line on Form 1040, Schedule A, line 23, subject to the 2% limit. These expenses are included in Box 1a.   F. Foreign Tax Paid (Box 6) Your Tax Information Statement includes foreign tax paid (withheld) from foreign source dividends credited to your account during 2008. Refer to page 22 for additional information. CASH AND NONCASH LIQUIDATION DISTRIBUTIONS (BOXES 8 AND 9) Generally, liquidation distributions are treated as amounts received from the sale or exchange of a capital asset and should be reported on IRS Form 1040, Schedule D (Capital Gains and Losses). DIVIDEND REINVESTMENT PLANS Your dividends may have been reinvested pursuant to a dividend reinvestment plan. Reinvested dividends are reported in this section of your tax information statement as if a cash dividend has been credited to your account. TAXABLE STOCK DIVIDENDS Your tax information statement includes the fair market value of preferred stock dividends, which according to information provided by the issuer, is considered dividend income. Note that these amounts also become your cost basis for determining the gain or loss. These transactions are denoted with a symbol (‡) on your tax information statement. STATE TAX-EXEMPT INCOME All or a portion of your income from certain mutual funds may be exempt from state and local taxes. These amounts are reported on Form 1099-INT as Tax Exempt Interest (Box 8), and as Specified Private Activity Bond Interest (Box 9), if applicable. IRS FORM 2439 If you own shares in a mutual fund that paid tax on undistributed long-term capital gains, we will issue IRS Form 2439 (Notice to Shareholder of Undistributed Long-Term Capital Gains) to you. This information is provided to us after the close of the fund's tax year and will be sent to you in a separate mailing shortly after the information is made available.

Frequently Asked Questions: Dividends and Distributions Erroneous Dividend Payment I received an interest payment from the paying agent that was incorrect. It was not mine, and I returned the money to you. However, the paying agent still sent an IRS Form 1099-INT to me and will not correct the information. How do I report this on my tax return? To avoid a mismatch with the IRS, this transaction should be reported twice on IRS Form 1040, Schedule B. First, report the amount from the paying agent’s IRS Form 1099-INT on Schedule B, line 1. Additionally, report the amount you paid to us as a negative adjustment on Schedule B, line 1. Title this negative adjustment “Nominee Distribution.” Refer to the Nominee Recipients section on page 4 for additional information. Stock Dividends Why is the fair market value of preferred stock dividends reported on my statement even though I did not receive cash in 2008? The fair market value of preferred stock dividends is taxable income to you in certain circumstances. You should report these amounts as dividend income on IRS Form 1040, Schedule B, line 5. Note that this amount also becomes your cost basis for determining gain or loss. Nondividend Distributions Why are nondividend distributions reported on my statement? We are required to report these distributions to you and to the IRS. Nondividend distributions generally reduce the cost basis of your investment. This becomes important when you dispose of your investment and need to calculate your gain or loss. However, once the cost basis of your stock has been reduced to zero, you must report subsequent nontaxable distributions as capital gains even though we report them as nontaxable. Qualified Dividends What is a Qualified Dividend? A qualified dividend is a dividend that is taxed at the preferential federal tax rate established by the Jobs and Growth Tax Relief Reconciliation Act of 2004, which was enacted in May 2004. Qualified dividends are generally subject to a maximum tax rate of 15% (or 0% for taxpayers in the 10% or 15% tax brackets). Why is it important to differentiate a dividend as qualified or nonqualified? It is important to distinguish a qualified dividend from other dividends because qualified dividends are subject to a lower federal tax rate than ordinary income. How do I know if my dividends are qualified dividends? You can identify which dividends are eligible for qualified dividend status by examining your Tax Information Statement and Form 1099- DIV, Box 1b. You have to then ensure that your specific circumstances (such as the holding period requirement—see question 6 below) allow the dividend to be reported as a qualified dividend on your tax return. How are qualified dividends reported on my tax information statement? Qualified dividends are reported in the Dividends and Distributions section of your Tax Information Statement, under the column titled "Qualified Dividends." Are the qualified dividends on my tax information statement eligible for the reduced rate? Yes. They are eligible for the reduced rate. However, in order for you to report these dividends as qualified on your tax return, you have to meet certain requirements, such as the holding period requirement. In addition, if you were short-against-the-box on the dividend’s ex-dividend date, your dividend will not be considered a qualified dividend, even though we reported it to you as a qualified dividend. What is the holding period requirement? You must meet a holding period requirement in order to report your dividends as qualified dividends on your tax return. These are the important points to note about the holding period requirement:     You must hold the stock more than 60 days during the 121-day period that begins 60 days prior to a dividend’s ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the purchaser of the stock is not entitled to receive the next dividend payment. The ex-dividend date is usually two days before the record date, which is the date set by the company on which an individual must own shares in order to be eligible to receive a dividend or capital gain distribution. For mutual fund shares, the ex-dividend date is usually the reinvestment date. When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. The number of days you are considered to hold the stock for this purpose is reduced for each day you diminish your risk of loss by entering into certain transactions, such as options or forward contracts, and short-against-the-box transactions. Holding Period Example: Assume the following facts:     July 1, 2008—You purchase 200 shares of XYZ company. July 9, 2008—XYZ’s stock goes ex-dividend. July 28, 2008—You receive a dividend from XYZ company, which we report as a qualified dividend on your Tax Information Statement. August 4, 2008—You sell your 200 shares of XYZ company. In this case, the 121-day period begins May 10, 2008, and ends on September 7, 2008. You held the shares from July 2, 2008, through August 4, 2008 (include the date you sold the shares, but not the date you acquired them)—a total of 34 days. Since you held the stock less than 61 days, your dividend on XYZ company is not a qualified dividend, even though we reported it to you as a qualified dividend on your Tax Information Statement. Is there a different holding period for preferred stock? Generally, the holding period for preferred stock is the same as stated above. However, if your preferred stock dividend is attributable to a period greater than 366 days, you must hold the stock for at least 91 days during the 181-day period that begins 90 days before the ex-dividend date. These types of dividends pay very rarely. Most likely, your preferred stock dividends would be subject to the 60-day requirement mentioned above. How does the holding period apply if I hold mutual fund shares? The holding period requirement for mutual fund shares is the same as the 60-day holding period mentioned above. If you do not hold your mutual fund shares more than 60 days, your mutual fund dividends will be nonqualified, even if we report them as qualified on your Tax Information Statement. What if I am "short-against-the-box" when I receive my dividend? Will it be considered a qualified dividend? If you are both long and short the same stock on the date the stock goes ex-dividend, the dividend you received on the long position will not be considered a qualified dividend. The Tax Code contains this rule presumably to prevent someone from taking deductions on their short selling expenses at ordinary rates, and then including the income at the preferential rate. Suppose I purchase an option to sell my security (a "put" option) and, as a result, I have diminished my risk of loss in the security that paid a dividend. Does this affect my holding period? Yes. Under the Tax Code, your holding period could be reduced if you enter into a transaction that diminishes your risk of loss. This is a complicated aspect of the tax law. You may need to consult with a tax professional if you have entered into transactions that could have diminished your risk of loss. How do qualified dividends impact my deduction for margin interest? For most taxpayers, margin interest expense is considered an investment expense, and the deduction for investment expense is limited to “net investment income.” In figuring your “net investment income” for this purpose, you would normally include your interest and dividends. You should be aware that any dividend you include in “net investment income” will not be considered a qualified dividend eligible for the reduced federal tax rates. See IRS Form 4952 for information about including your qualified dividends as investment income. How do qualified dividends impact my foreign tax credit? Your foreign tax credit is figured on IRS Form 1116. On this form, you are required to calculate your foreign tax credit limitation, which very generally is: In figuring your foreign income for purposes of this limitation formula, you may be required to adjust the amount of foreign qualified dividends used in computing your foreign tax credit. See the instructions for IRS Form 1116 for more information. When are foreign dividends reported as qualified dividends? The tax code contains special rules for dividends paid by a foreign corporation. A foreign corporation’s dividends are considered qualified if the foreign corporation meets any of the following conditions:     The corporation is incorporated in a U.S. possession. The corporation’s stock is readily tradable on an "established market" in the U.S., such as the New York Stock Exchange or the NASDAQ stock market. Certain other markets, such as the Pink Sheets or the NASDAQ over-the-counter (OTC) Bulletin Board, are not considered established markets for this purpose. The company is eligible for the benefits of an income tax treaty with the U.S. that the Treasury Department determines is satisfactory for this purpose and that contains an exchange of information program. Exception for Foreign Investment Companies: If a foreign corporation is a passive foreign investment company, its dividends will not be considered qualified dividends. Are dividends from mutual funds, REITs, or UITs considered qualified dividends or capital gain distributions? The character of dividends from mutual funds, REITs, and UITs varies based on the underlying investments that comprise these funds. We report dividends from these companies based on information they provide to us. We will report their dividends as nonqualified when they do not provide any information to us. In this case, we will denote the income with a symbol (**), which will appear next to the description of the company in the 1099-DIV section of the Tax Information Statement. This symbol means that we have not received information needed to classify your income, and you may receive a revised Tax Information Statement from us if we receive information that changes your income classification. Are dividends from money market funds or bond funds considered qualified dividends? No. Dividends from money market funds and bond funds are considered nonqualified dividends. However, since distributions from bond funds may be classified as capital gain distributions, your income from a bond fund may be reclassified. Your Tax Information Statement may reflect the symbol (**) next to the description of the bond fund if we have not received reclassification information from the fund (see the preceding question 14). How do I report qualified dividends on my tax return? Once you determine which of your dividends are qualified dividends, you should:     Enter your qualified dividends on IRS Form 1040, line 9b, and Figure your tax by completing the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions or the Schedule D Tax Worksheet in the Schedule D instructions, whichever applies. See the instructions to IRS Form 1040, Schedule D (Capital Gains and Losses) for more information on how to report your qualified dividends. Are dividends on preferred stock considered qualified dividends? There are generally no distinct rules for determining if dividends on preferred stock qualify for the reduced rates. All of the rules referred to above apply to dividends on preferred stock. However, there are two points you should note:     In rare circumstances, the holding period requirement is 91 days, as opposed to 61 days (see the preceding question 7). Certain preferred securities pay interest, as opposed to dividends. Although these securities may be labeled as stock, they are actually classified as debt for federal tax purposes. The income from these securities will not qualify for the reduced rates, and is reported to you in the 1099-INT or 1099-OID section of your Tax Information Statement. These securities are listed under various names, such as fixed rate capital securities (also referred to as MIPs, QUIDs, QUIPs, TOPrS, etc.). Where can I get more information about qualified dividends? IRS Publication 550 (Investment Income and Expenses) contains useful information on reporting dividend income. This publication is available at www.irs.gov.