Dividends and Tax Information
Dividends and Capital Gains Overview
Understanding dividends and capital gains
How do capital gains work?
There can be two sources of capital gains for a mutual fund shareholder:
- Gains from distributions: Capital gains realized by the fund on sales of its portfolio securities are passed through to shareholders as distributions. These amounts are reported to you by the fund on Form 1099-DIV. Short-term capital gains are included on Form 1099-DIV, Box 1a. Long-term capital gains are identified on Form 1099-DIV, Box 2a.
- Gains from sales: If you sell or exchange your mutual fund shares, you must pay tax on any gains arising from the sale, just as you would from a sale of individual securities. Shares that are held one year or less are considered short-term and are taxable at the shareholder's income tax rate. Shares held for more than 12 months are considered long-term and taxable at a reduced rate.
Redemptions of mutual fund shares are reported to you on Form 1099-B. Remember that redemptions from municipal bond funds are taxable transactions.
2023 qualified dividends and long-term capital gains:
| Tax Rate | Single Filers | Married and Filing Jointly |
|---|---|---|
| 0% | $0 to $44,625 | $0 to $89,250 |
| 15% | $44,626 to $492,300 | $89,251 to $553,850 |
| 20% | $492,301 + | $553,851+ |
2023 non-qualified dividends and short-term capital gains:
| Tax Rate | Single Filers | Married and Filing Jointly |
|---|---|---|
| 10% | $0 to $11,000 | $0 to $22,000 |
| 12% | $11,001 to $44,725 | $22,001 to $89,450 |
| 22% | $44,726 to $95,375 | $89,451 to $190,750 |
| 24% | $95,376 to $182,100 | $190,751 to $364,200 |
| 32% | $182,101 to $231,250 | $364,201 to $462,500 |
| 35% | $231,251 to $578,125 | $462,501 to $693,750 |
| 37% | $578,126 + | $693,751 + |
Why do I pay taxes on capital gains distributions when my fund's share price decreased?
Capital gain distributions occur independently of price fluctuations in a fund. A mutual fund is required to distribute annual income and/or capital gains to its shareholders. At the same time, changes in financial markets can cause the price of fund shares to go up or down.
Do I pay taxes on reinvested dividends?
Yes, reinvested distributions are taxed the same as cash distributions.
What are the tax implications of a municipal fund investment?
Tax-free funds are mutual funds whose income dividends are earned from bonds issued by a municipality and are generally exempt from federal income tax. A portion of the federally exempt interest dividends from some state-specific tax-free funds may be exempt from state income tax, especially if you live in the state of issue.
State-specific tax-free funds are mutual funds whose income dividends are earned from bonds issued by a municipality in a particular state and are generally exempt from federal and that state's income tax. A portion of the federally exempt interest dividends from some state-specific tax-free funds may be exempt from state income tax, especially if you live in the state of issue. Income from territorial obligations (Guam, Puerto Rico, and the U.S. Virgin Islands) is generally exempt from both federal and state personal income taxes.
Are there other potential tax consequences with municipal fund investments?
Yes. A mutual fund whose income dividends are earned from U.S. Treasury and certain other government securities may be categorized as a fund containing U.S. government obligations. Income from mutual fund investments in U.S. government obligations may be exempt from state personal income taxes. Some states, such as California, Connecticut, and New York, impose restrictions on the fund's ability to pass through to you the exempt nature of this interest income.
Any tax or legal information on this website is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. Allspring Global Investments does not provide accounting, legal, or tax advice or investment recommendations.
