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Tax Season Resources

About 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.

What are the 2018 rates on dividends and capital gains?

Tax rate on gains from distributions (Form 1099-DIV) and sales (Form 1099-B).

Single

Income Income Tax Dividends & Short-Term Capital Gains Qualified Dividends & Long-Term Capital Gains
$0 to $9,525 10% 10% 0%
$9,526 to $38,600 12% 12% 0%
$38,601 to $38,700 12% 12% 15%
$38,701 to $82,500 22% 22% 15%
$82,501 to $157,500 24% 24% 15%
$157,501 to $200,000 32% 32% 15%
$200,001 to $425,800 35% 35% 15%
$425,801 to $500,000 35% 35% 20%
$500,001 + 37% 37% 20%

Married, Filing Jointly

Income Income Tax Dividends & Short-Term Capital Gains Qualified Dividends & Long-Term Capital Gains
$0 to $19,050 10% 10% 0%
$19,051 to $77,200 12% 12% 0%
$77,201 to $77,400 12% 12% 15%
$77,401 to $165,000 22% 22% 15%
$165,501 to $315,000 24% 24% 15%
$315,001 to $400,000 32% 32% 15%
$400,001 to $479,000 35% 35% 15%
$479,001 to $600,000 35% 35% 20%
$600,001 + 37% 37% 20%

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 information
    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 information
    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?

  • U.S. government holdings
    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.
 

What is Cost Basis?

Cost basis is the cost of the shares you purchased, including reinvested dividends and capital gains distributions. The cost is adjusted for any applicable sales charges or transaction fees.

When you sell shares in a taxable account, the cost basis accounting method you choose helps determine how your gain or loss is calculated.

The IRS treats the sale of mutual fund shares differently, depending on their purchase date. The IRS classifies shares as covered or noncovered.

Covered shares are those purchased or reinvested in 2012 and beyond.

Additional cost basis information is reported to the IRS on Form 1099-B, including:

  • The amount of your mutual fund sale
  • The cost basis amount when covered shares are sold
  • If the shares were held short term or long term.1
  • If the sale included a wash sale and the amount

Note: The IRS will rely upon the cost basis information on Form 1099-B for covered shares. Please consult your tax advisor to ensure you are accurately reporting the values on your personal tax filing.

Noncovered shares are those purchased or reinvested before 2012.2

  • We are required to report sales of mutual funds to the IRS.
  • You are responsible for reporting all gains or losses on the sale of your shares.
  • As a service, we continue to provide average cost information on sales of noncovered shares on eligible accounts.3
  • You are not required to use the cost basis information we provide. You or your tax advisor may use an alternative method.

What cost basis methods for selling shares are available?

Average cost:

This is the most common method for mutual funds and can be determined using the following calculation:

Total cost of all shares ÷ total number of shares in the account = average cost per share

Since 2012, your account may maintain two separate average costs: one average for covered shares and a separate average for noncovered shares.

First-in first-out (FIFO) :

The shares purchased first are sold first.

Specific lot identification:

  • You choose the shares (or lots) to sell.
  • Your gain or loss will vary, depending on which shares you choose.
  • For sales where you cannot specify your lots, such as checkwriting or systematic withdrawals, a secondary cost basis method is available. If you do not select a secondary method, FIFO is used.

For covered shares, we offer additional specific identification methods:

  • Last-in first-out (LIFO): The shares purchased last are sold first.
  • High cost: Highest-cost shares are sold first.
  • Low cost: Lowest-cost shares are sold first.
  • Loss/gain utilization: Shares with the smallest tax consequence are sold first.
    • For sales that would result in a loss, short-term shares are sold first, followed by long-term shares.
    • For sales that would result in a gain, long-term shares are sold first, followed by short-term shares, because long-term capital gains rates are more favorable.

Special handling for noncovered shares:

  • As a service, we continue to provide average cost information on sales of noncovered shares on eligible accounts.3
  • You are not required to use the cost basis information we provide. You or your tax advisor may use an alternative method for your personal tax filing.
  • If you have noncovered shares, they will be sold first using average cost.
  • We do not report cost basis information to the IRS for noncovered shares.

Exceptions for specific lot identification:

  • If you selected specific lot identification, you may select from both covered and noncovered shares for sales.
  • Cost basis information we provide for noncovered shares may not reflect your actual cost. Refer to your personal records to determine the cost of lots sold.

To designate a cost basis method other than average cost:

  1. Short-term holdings are shares sold within one year of purchase. Long-term holdings are shares sold more than one year after purchase.
  2. This also includes shares that do not have complete cost basis information, regardless of purchase date.
  3. We do not provide average cost for retirement, education, or money market accounts. There may be circumstances preventing a specific account from having cost basis information.
 

Depositing your tax return directly into your account

It can be a great financial decision to invest your tax refund right into your account. The IRS allows you to divide your federal income tax refund among up to three existing accounts, including IRAs. The amount must be at least $100.

If you are depositing your refund into only one account, you can simply fill out the two lines in the refund section of Form 1040 and Form 1040A—one line is for the routing number and the other one is for your account number. If you want to deposit your refund into two or more accounts, you will need to fill out IRS Form 8888 and indicate on Form 1040 or Form 1040A that you have attached that form.

Instructions for the refund section of Form 1040 or on Form 8888:
Routing (or ABA) number
    11000028

Your account number

WE1 followed by the 4-digit fund number and 10-digit account number (no dashes/spaces); for example, WE13279XXXXXXXXXX
Account type Checking
 

Specifying the tax year

Tax refunds deposited into an IRA account will be treated as a current tax year contribution. If you have made a deposit into your IRA prior to the tax filing deadline and wish to designate it as a prior- year contribution, please contact us after we have received the contribution and before the tax filing deadline. To qualify as a prior-year contribution, deposits must be received no later than the tax filing deadline, not including extensions.

 

IRS resources

A few forms are listed below; for additional details, refer to the IRS phone number and website.

IRS telephone number: 1-800-829-1040

IRS website: www.irs.gov

Frequently used IRS publications and forms

*This publication offers a complete list of titles.

 

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. Wells Fargo Funds Management, LLC; Wells Fargo Funds Distributor, LLC; or any of their representatives may not give legal or tax advice.

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