Capital Gains Can Be a Double-Whammy For Fund Shareholders

Got any last-minute tax questions? Then post them on our Tax Forum message board. Martin Nissenbaum, national director of personal-income-tax planning at Ernst & Young will answer as many questions and lend his expertise as he can on Wednesday from 4 p.m. to 6 p.m. EDT. So post early.

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The Form 1099DIV I received from my brokerage company lists the distributions on the funds that I sold in 1999. Since I am already reporting capital gain, should I also be reporting these distributions from line 2a? If I do, then am I not paying taxes twice on the same gain?

-- Dr. Mahesh Gupta

Dr. Gupta,

You are not paying the same tax twice. Capital gains from the sale of mutual fund shares and capital gain distributions are two very different things.

Let's talk about gains from the sale of mutual funds first.

When you sell mutual fund shares, you will get a Form 1099B -- Proceeds from Broker and Barter Exchange Transactions that reports your gain or loss. If it's a gain, you'll owe tax on it.

Report all the information from your 1099B on Schedule D -- Capital Gains and Losses, just like you would a stock trade.

Capital gain distributions are a different story.

A mutual fund is what is called a pass-through entity. Whenever a fund manager sells a security for a gain or holds a security that pays a dividend, those gains and dividends must be passed on to shareholders by the end of the fund's fiscal year.

Say your fund manager bought a stock for $20 last year and sold it this year for $60. He has incurred a $40 gain that will be distributed to you and your fellow shareholders. So even if you didn't sell shares of your fund, you still could wind up paying capital gains taxes.

That distribution is reported to you on Form 1099DIV -- Dividend Distributions in box 2a. You must report that capital gain distribution amount on line 13 of Schedule D. Check out this previous Tax Forum for more on mutual fund shares and distributions.

Here's a new shortcut for mutual fund holders who did not sell any shares in 1999.

If you have a capital gains distribution in box 2a of your Form 1099DIV, you do not need to file Schedule D if the following are true:

• You have no other capital gains in 1999 -- you didn't sell any stocks, bonds, mutual funds, etc.

• There are no amounts reported in box 2b, 2c or 2d of your Form 1099DIV.

If the above are true, then just plop the amount from box 2a on line 13 of your Form 1040 -- U.S. Individual Income Tax Return. Be sure to check the corresponding box on line 13 that notes you're not filing Schedule D.

One less form translates into fewer hours of confusion.

Stop Smoking, Take a Deduction

If you entered a stop-smoking program in 1999, you can deduct the amount you paid for the program and any prescribed drugs to treat nicotine withdrawal as a medical expense. You cannot include nicotine gum, patches, etc., that are not prescribed by a doctor.

Remember, you can deduct only the amount of medical and dental expenses that exceed 7.5% of your adjusted gross income. Report these expenses on Schedule A -- Itemized Deductions. Don't include any medical expenses that were reimbursed by your insurance carrier.

If you entered a stop-smoking program in 1996, 1997 or 1998, you may be able to go back and amend your tax return to claim these expenses. Just make sure it's worth your time and effort before you go through the administrative nightmare of amending your tax return.

Estimated Tax Reminder

And here's an unpleasant reminder: If you make estimated tax payments, your first payment for 2000 is due April 17. If you expect your adjusted gross income for 2000 to be below $150,000, your estimated tax payments must equal either 90% of your 2000 taxes or 100% of the tax you paid in 1999. If your income is above $150,000, you must pay in 108.6% of your 1999 tax. See this previous Tax Forum for more details.

Good News for Senior Citizens

On Friday, President Clinton signed the Senior Citizens' Freedom to Work Act of 2000. This act eliminates the Social Security retirement earnings penalty for senior citizens who continue working.

Previously, taxpayers who hit retirement age, currently 65, would forfeit $1 of Social Security benefits for every $3 earned over the $17,000 limit in 2000, according to RIA, an information provider to tax professionals. (The limit was scheduled to increase to $30,000 by 2002.) That's no longer the case.

If your Social Security payments were reduced by this rule in 2000, thanks to this new law, you will get retroactive payments back to Jan. 1, if you're not yet 70.

Check out the Social Security Administration's Web site for more information

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