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What’s Lurking In Your Mutual Fund?

 

Tuesday Tax Tip: Mutual fund dividends from interest on direct U.S. government securities are exempt from state and local taxes.

Terms:

  • 1099-INT: Report your interest income to you and the IRS
  • 1099-DIV: Report your dividends and capital gains distributions from your accounts to you and the IRS. Certain distributions from mutual fund and credit union refer to dividends though these are actually reported as interest income.
  • Interest on US Government Obligations: Income received from certain debt obligations of the federal government such as treasury bonds, notes, bills, and saving bond. Interest incomes from these investments are fully taxable for federal income tax purposes, but generally exempt from state income tax.

 

Hopefully you are seeing tax forms arriving in your mailbox. Depending upon your investment you may receive forms called 1099-INT and 1099-DIV.  Even if you don’t prepare your own tax returns, you should review your forms and instructions. Why?  It’s your money and often I see people overlook adjustments for federal interest on their state returns. As a result, you pay more money in taxes and have less money in your pocket.

Where To Find US Government Interest on 1099-INT and 1099-DIV

A 1099-INT has a line item for federal interest, therefore making an adjustment for state tax reporting is fairly easy. However, a 1099-DIV does not have a separate line item for federal interest, so you need to make this calculation.

Example: Fidelity

Fidelity Tax Statement

 

Calculating US Government Interest on Mutual Fund Dividends:

Determining the amount of your mutual fund dividend that is federal income and exempt from state taxes is fairly easy.

Multiply the “% of dividends from U.S. government securities” found in Column 1 by the Amount for that fund in Box 1a of your Form 1099-DIV.

 

Example: Vanguard:
Vanguard Percentage US Government InterestVanguard 1099-DIV

 

 

 

 

 

 

=> Using the Vanguard Example:  $1,000 x .1437 = $147.30.  This amount is then entered on line 7 as a subtraction modification for a Wisconsin Tax Return

 

State Reporting US Government Interest

If your state has an income tax and you receive this income from certain government obligation, look for the line on your state income tax return.

Example: Wisconsin Adjustment for US Government Interest

Wisconsin 2011

Your mutual fund should provide “U.S,. Government Obligation” information in an annual statement or report, which usually accompanies your 1099-DIV. If you did not receive this information or can’t find it, contact the mutual fund or your broker.

Before I end today, I need to include a disclosure statement: State and federal taxes can be confusing and complex, you should contact your tax advisor on what you can and can not include on your tax return.

by MoneyandMap.com Tuesday · comments

categories: Tax Return Tips

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