The beneficial long-term capital gains rates on sales of mutual fund shares apply only to profits on shares held more than a year before sale.
(Profit on shares held a year or less before sale is ordinary income, but capital gain distributions are long-term regardless of the length of time held before the distribution.) Before 5/6/03. For capital gains distributions received after 5/5/03 and for gains on shares held long-term (more than a year) when sold after 5/5/03, the tax rate is 15% of net gain (except 5% if the taxpayer is otherwise below the 25% bracket).
Because these payments are considered dividends to you, they must be reported on your tax return.
As qualified dividends, they will enjoy the special low tax rate granted dividends in the 2003 Tax Act: specifically, a tax rate of 15% (except 5% for taxpayers in tax brackets below 25% and 0 for those taxpayers in 2008).
Tax on the gain is ,500, which is composed of 0 (5% of that part of the gain within the spread from their taxable income to where the 25% bracket begins) plus ,250, which is 15% of the balance of the gain.
You must generally report as income any mutual fund distributions, whether or not they are reinvested.It has turned out that the election does no good for sales before 2009, where the tax rate has been reduced to 15% anyway.The election is irrevocable and no provision has been made to refund tax paid.The 2003 Act imposes several different tax rates in 2003 on the same person, for the same kind of transaction, depending on tax bracket, period held, and when during the year the transaction occurred.Official Washington is predicting massive taxpayer confusion, tax reporting complexities and mistakes, resulting from the capital gains changes. Mutual funds sometimes retain a part of their capital gain and pay tax on them.