Closed-end tax guide

Although most income distributions from your tax-exempt fund are not subject to regular federal income taxes, there are some instances in which you will receive some taxable income:

• Mutual funds and other regulated investment companies are required to report exempt-interest dividends in Box 11 of Form 1099-DIV
• Your fund paid a capital gain.
• Your fund was required to recognize taxable income on securities purchased at a discount.
• Your participation in the fund's dividend reinvestment plan generated discount income (the difference between the discounted purchase price and the market price of reinvested shares is taxable). This amount is included in Box 1a (total ordinary income) on Form 1099-DIV.

Yes. Income from taxable funds and all capital gain distributions are taxable, regardless of whether you receive them in cash or reinvest them in additional fund shares. You should keep a record of the amount of dividends reinvested because this will increase your cost basis in the fund's shares. By keeping track of reinvested dividends, you'll be able to determine the correct taxable gain or loss when you redeem or exchange your fund shares.

Under current tax law, the taxable income shown on Form 1099-DIV must include distributions for the year in which they are declared, even if the distribution isn't actually received until January of the following calendar year.

A qualified dividend is paid to the fund by a "qualified" company. This is defined as a domestic company traded on a qualifying exchange or a foreign company where the country of origin has a comprehensive income tax treaty with the US that includes an exchange of information program. There is also a holding period requirement that must be met for a dividend to be deemed qualified. Qualified dividends may be eligible for a reduced tax rate.

If your fund's manager purchased securities and later sold them for more than the purchase price, your fund earned capital gains. These gains are distributed to shareholders during the year. If you received a capital gain distribution during the year, you will be required to pay taxes on that amount, regardless of whether you received it in cash or reinvested it in additional shares. The capital gains amount can be found on Form 1099-DIV.

Yes. Capital gains are generally taxed at a lower rate than ordinary income.

Certain states have special exemptions for income earned from US government securities and tax-free municipal securities issued in that state. You can find an income breakdown by state for your fund inside this tax insert, which should help you identify any income that may be tax-exempt in your state. Consult your tax advisor or state tax agency about the specific rules in your state.

Federal law generally requires us to withhold 24% of any distribution or redemption if we do not have a correct and certified Social Security or taxpayer identification number for your account. The IRS tells us which Social Security or taxpayer identification numbers are not correct or certified and requires us to perform this withholding. The withholding amount shown on your 1099 forms should be reported as "federal income tax withheld" on your federal income tax return.