Publication 564 - Mutual Fund Distributions Instructions

Table 4. What Is Your Maximum Capital Gain Rate?

IF your net capital gain is from. . .

THEN your maximum capital gain rate is. . .

collectibles gain

28%

gain on qualified small business stock equal to the section 1202

exclusion

28%

unrecaptured section 1250 gain

25%

other gain

and the regular tax rate that would apply is 27% or

higher

20%

other gain

and the regular tax rate that would apply is lower than

27%

or 10%

“Other gain” means any gain that is not collectibles gain, gain on qualified small business stock, or unrecaptured section 1250 gain.

The rate is 8% only for qualified 5-year gain.

Example. You have a capital gain distribu-

during the year, you can deduct your share of

1) Your allowable capital loss deduction for

tion that is a section 1202 gain, so the maximum

the investment expenses on your Schedule A

the year, or

capital gain rate on the distribution would be

(Form 1040). Claim them as a miscellaneous

28%. Because you are single and your taxable

itemized deduction to the extent your miscella-

2) Your taxable income increased by your al-

income is $25,000, none of your taxable income

neous itemized deductions exceed 2% of your

lowable capital loss deduction for the year

will be taxed above the 15% rate. The 28% rate

adjusted gross income. Your share of the ex-

and by your deduction for personal exemp-

does not apply.

penses will be shown in box 5 of Form

tions.

1099 – DIV. A nonpublicly offered mutual fund is

8% rate. The 10% maximum capital gain rate

If your deductions exceed your gross in-

one that:

is lowered to 8% for “qualified 5-year gain.”

come, you start the computation in (2) above

with a negative number.

1) Is not continuously offered pursuant to a

Qualified 5-year gain. Qualified 5-year

Use the Capital Loss Carryover Worksheet

public offering,

gain is capital gain from the sale of property that

in the Schedule D instructions to figure your

was held for more than 5 years.

2) Is not regularly traded on an established

capital loss carryover.

securities market, and

When carried over, the loss will keep its

Note. Your mutual fund may issue Form

original character as long-term or short-term.

3) Is held by fewer than 500 persons at any

1099 – DIV or Form 2439 showing qualified

Therefore, a long-term capital loss carried over

time during the tax year.

5-year gain. Enter these amounts and any other

from a previous year will offset long-term gains

qualified 5-year gain on the Qualified 5-Year

Contact your mutual fund if you are not sure

of the current year before it offsets short-term

Gain Worksheet, in the instructions for Schedule

whether it is nonpublicly offered.

gains of the current year. For more information

D (Form 1040).

on figuring capital loss carryovers, get Publica-

Expenses allocable to exempt-interest

tion 550.

dividends. You cannot deduct expenses that

18% capital gain rate. Beginning in 2006, the

are for the collection or production of exempt-in-

20% maximum capital gain rate will be lowered

Separate returns. Capital loss carryovers

terest dividends. Expenses must be allocated if

to 18% for qualified 5-year gain. The holding

from separate returns are combined if you now

they were for both taxable and tax-exempt in-

period for the property sold must have begun

file a joint return. However, if you once filed

come. One accepted method for allocating ex-

after 2000.

jointly and are now filing separately, a capital

penses is to divide them in the same proportion

loss carryover from the joint return can be de-

that each type of income from the mutual fund is

ducted only on the separate return of the spouse

Limit on Capital Loss Deduction

to your total income from the fund. To find the

who actually had the loss.

part of the expenses that relates to the tax-ex-

If line 17 of Part III, Schedule D (Form 1040)

empt income, you must first divide your tax-ex-

shows a loss, your allowable capital loss deduc-

empt income by your total income. Then multiply

tion is the smaller of:

your expenses by the result. You cannot deduct

Investment Expenses

this part.

1) $3,000 ($1,500 if you are married and fil-

You can generally deduct the expenses of pro-

ing a separate return), or

Example. William received $600 in divi-

ducing taxable investment income. These in-

dends from his mutual fund: exempt-interest div-

2) Your total net loss shown on line 17 of

clude expenses for investment counseling and

idends of $480 and taxable dividends of $120. In

Schedule D.

advice, legal and accounting fees, and invest-

earning this income, he had a $50 expense for a

ment newsletters. These expenses are deducti-

Enter your allowable loss on line 13 of Form

newsletter on mutual funds. William divides the

ble as miscellaneous itemized deductions to the

1040.

exempt-interest dividends by the total dividends

extent that they exceed 2% of your adjusted

to figure the part of the expense that is not

Example. Bob and Gloria sold all of their

gross income. See chapter 3 in Publication 550

deductible. Therefore, 80% ($480 ÷ $600) of

shares in a mutual fund. The sale resulted in a

for more information.

William’s expense is for exempt-interest in-

capital loss of $7,000. They had no other sales

Interest paid on money to buy or carry invest-

come. He cannot deduct $40 (80% of $50) of the

of capital assets during the year. On their joint

ment property is also deductible, but the deduc-

expense. William may claim the balance of the

return, they can deduct $3,000, which is the

tion may be limited. See Limit on Investment

expense, $10, as a miscellaneous itemized de-

smaller of their loss or the net capital loss limit.

Interest Expense, later.

duction subject to the 2%-of-adjusted-gross-in-

If Bob and Gloria’s capital loss had been

come limit. That is the part of the expense

Publicly offered mutual funds. Most mutual

$2,000, their capital loss deduction would have

allocable to the taxable dividends.

funds are publicly offered. Expenses of publicly

been $2,000, because it is less than the $3,000

offered mutual funds are not treated as miscella-

limit.

Limit on Investment

neous itemized deductions. This is because

Interest Expense

Capital loss carryover. If your total net loss is

these mutual funds report only the net amount of

more than your allowable capital loss deduction,

investment income after your share of the in-

you may carry over the excess to later years

The amount you can deduct as investment inter-

vestment expenses has been deducted.

until it is completely used up. To determine your

est expense may be limited in two different

capital loss carryover, subtract from your total

Nonpublicly offered mutual funds. If you

ways. First, you may not deduct the interest on

net loss the lesser of:

own shares in a nonpublicly offered mutual fund

money you borrow to buy or carry shares in a

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Publication 564 - Mutual Fund Distributions Instructions - 2002 Page 10

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