If you're not as up on mutual fund taxation as you'd like to be, or you just need general guidance with a taxable transaction, this section can help. We encourage you to consult your tax advisor to fully understand tax consequences according to your individual circumstances.

A capital gain (loss) is the increase (decrease) in the value of your investment when these situations occur:

• you sell or exchange your shares or
• a mutual fund sells securities above (below) the purchase price. Any net capital gains earned by mutual funds are distributed to shareholders annually and reported on Form 1099-DIV. Capital losses are also reported and can be used to offset any capital gains.
  
  

Yes, there are two types:

1. Short-term capital gains distributions—If the investment is held for one year or less, the gain at the time of sale is considered short-term.
2. Long-term capital gains distributions—If the investment is held for more than one year, the gain upon selling it is considered long term.

For federal tax purposes, short-term capital gains are taxed as ordinary income at your marginal tax rate (dividend distributions are also included in ordinary income).

Long-term capital gains are taxed at the capital gains tax rate of either 5% (for taxpayers in the 15% tax bracket) or 15% (for all other individual taxpayers).

Ordinary dividends, if any, are considered to be income and must be reported as dividend income on your tax return. If you receive more than $400 in ordinary dividends from all of your investments, you must attach a Schedule B to your Form 1040.

Capital gains distributions, if any, should be reported as directed by your fund company, no matter how long you've owned your fund shares. Short-term capital gains realized in mutual funds are paid out and taxed as ordinary income.

Non-taxable distributions that represent a return of capital are not taxed, but do reduce the cost basis of your fund shares.

This is the date on which you must officially own shares in order to be entitled to dividend and/or capital gains distributions. If you own fund shares on the record date, you will receive the distribution. You are not entitled to the distribution if you invest after the record date.

When the fund distributes its dividends and/or capital gains, it is termed "ex-dividend," meaning that the amount of the distribution has either been paid to shareholders of record or deducted from the fund assets. The fund's net asset value per share decreases by the distribution amount on the ex-dividend date.

While it may be wise to reinvest your dividends, ordinary dividends and capital gain distributions that are reinvested are still subject to tax in the year in which they are distributed. Reinvested amounts should be added to the cost basis to avoid paying unnecessary taxes when you redeem your shares.

When you exchange shares from one fund to another, you sell shares of the first fund and buy shares of the second. A Form 1099-B (or 1099-R for retirement plans if you exchange from your account) will be mailed to investors who exchange shares within the funds. The sale may generate capital gains or losses, which must be reported on your tax return, whether or not the Fund invests in taxable or tax-exempt securities.

Though the fund's share price decreased, not all of the securities held in the portfolio had capital losses. Some may have been sold throughout the year and realized capital gains which exceeded the portfolio's losses.

If you redeem only some of your shares, there are four different ways to identify which shares you have sold. The most common method is referred to as FIFO. First in, first out (FIFO) considers the first shares bought as the first shares sold. Unless you specify another accounting method, the IRS will assume you are using FIFO. You should discuss this issue with your tax advisor and keep in mind that you will need to maintain proper tax records in order to identify the shares that you sell.

A return of capital is a distribution that may occur if a fund distributes amounts that are not out of earnings and profits. If you've received a return of capital, it will be reported on Form 1099-DIV. A return of capital is not taxed as ordinary dividends, but is treated as a return of your original investment. As such, it will reduce the cost basis of your shares in the fund by the amount you receive. Since your basis cannot be reduced below zero, if a return of capital exceeds the adjusted tax basis of your shares, the excess amount must be reported as a capital gain. Whether it is a long-term or short-term capital gain depends on how long you held the shares.

There are some long-term capital gains that can be distributed by municipal bond funds, despite their objective of earning income free from federal income taxes.

No. A portion of income from international funds may have been subject to foreign tax withholding. If so, you may be entitled to a tax deduction or credit on your pro rata share of taxes paid. If a foreign tax credit is available, it may be more advantageous than a deduction, but you will have to complete Form 1116 and attach it to your Form 1040. Your tax advisor can provide you with further details.

This information is for educational purposes only. We do not provide tax advice. Instead, we encourage you to consult with a tax professional to determine how your investments will affect your income taxes.

Your annual statement contains valuable information that can assist you in preparing your income taxes. Other communications, such as Form 1099-DIV, provide the data you need, exactly as it has been reported to the IRS. Please retain all tax-related communications to assist you in your current and future tax planning and reporting. It is important for investors in IRA accounts to retain their annual statements, since Form 5498 will not be sent until May, which is after the filing deadline for most taxpayers.