How to Report Taxable Mutual Fund Gain Distributions

Mutual funds are normally required to distribute their net realized long-term capital gains each year and report it on Form 1099-DIV. However, mutual funds can decide to retain some capital gains and pay tax on these undistributed funds. These undistributed amounts are reported on Form 2439 along with your share of the taxes paid. The income is taxable to you, but you can take a tax credit.

Difficulty: Moderately Easy

Instructions

1. Contact your mutual fund company if you do not receive Form 1099-DIV by the end of February for the prior year.

2. Check Form 1099-DIV to see if capital gains were distributed. Amounts shown in Box 2a are capital gain distributions you must report on Schedule D of your tax return.

3. Report capital gain distributions on Schedule D line 13. If there aren't other items to report on Schedule D, you can report the gain distributions directly on Form 1040 line 13 and disregard Schedule D.

4. Review Form 2439 if there were taxable undistributed capital gains during the year. Form 2439 also shows the tax amounts allocated to you which you can claim as a tax credit.

5. Attach Copy B of Form 2439 to your income tax return to show the tax that was allocated to you and which you are claiming as a tax credit. Retain Copy C of Form 2439 for your tax file.

6. Increase the tax cost basis of your mutual fund shares by the amount of the undistributed gains reported in income to eliminate double taxation of those amounts.