Your investment income is generally not subject to regular withholding. However, it can be subject to backup withholding to ensure that income tax is collected on this income.

When you open up a new account, you must certify under penalties of perjury that your social security number is correct and that you are not subject to backup withholding. Form W-9 (PDF), Request for Taxpayer Identification Number and Certification , is used to make this certification. If you fail to make this certification on Form W-9, or similar statement, backup withholding will begin immediately on your new account, and a percentage of the interest paid on your account (29% after December 31, 2003; 28% after December 31, 2005) will be withheld. There are exceptions to this rule. For additional information on who is subject to backup withholding, refer to Tax Topic 307.

References:

• Form W-9 (PDF), Request for Taxpayer Identification Number and Certification
• Tax Topic 307, Backup withholding

Enter the ordinary dividends from Form 1099-DIV (PDF), box 1, on line 9 of Form 1040 (PDF), U.S. Individual Income Tax Return. Enter the total capital gain distributions from box 2a on line 13, column (f) of Form 1040, Schedule D (PDF). Enter the 28% rate gain portion of your capital gain distributions from box 2b on line 13, column (g) of Schedule D. If you have an amount in box 2c or box 2d, refer to Instructions for Form 1040, Schedule D. Nontaxable distributions, box 3, that are return of capital distributions, reduce your cost basis and are not taxable until your basis is reduced to zero. If no amount is shown in boxes 2b through 2d, and your only capital gains and losses are capital gain distributions, refer to Instructions for Form 1040 for line 13.

References:

• Form 1040, Schedule D (PDF), Capital Gains and Losses
• Instructions for Form 1040
• Instructions for Form 1040, Schedule D

I received a Form 1099-G (PDF) , for my state tax refund. Do I have to include this amount as income on my tax return?

If you did not itemize your deductions on your Federal tax return for the same year as the state or local tax refund applies to, do not report any of the refund as income.

If you itemized deductions on your Federal tax return for 2002, and received a refund of state or local taxes in 2002, you may have to include all or part of the refund as income on your 2003 tax return. Report your taxable State or Local Refunds on Form 1040, Line 10. You cannot use Form 1040A or 1040EZ. Refer to Tax Topic 405, Refund of State and Local Taxes , and Publication 525 , Taxable and Nontaxable Income , for further information.

References:

• Publication 505, Taxable and Nontaxable Income
• Tax Topic 405, Refund of State and Local Taxes
• Instructions for Form 1040

You may have received either a Form 1099-A (PDF), Acquisition or Abandonment of Secured Property, or Form 1099-C (PDF), Cancellation of Debt, or both. You may not have to report gain on the sale of property and, depending on the circumstances, you may have cancellation of indebtedness as well. You have cancelled debt income if the debt cancelled, as a result of the foreclosure and it exceeds the fair market value of the property at the time of he transfer. Cancelled debt income is taxable as other income on line 21 (other income) of Form 1040 (PDF). Refer to Publication 544, Sales and Other Disposition of Assets. Complete Table 1-2, Worksheet for Foreclosure & Repossessions to determine if there is income from cancellation of debt or gain or loss from foreclosure or repossession.

You may be able to exclude all or part of the cancelled debt income if all or part of the debt was discharged in bankruptcy; if you were insolvent immediately before the transfer; or if the debt is a qualified farm debt or qualified real property indebtedness. Refer to Publication 908, Bankruptcy Tax Guide.

You may be required to compute gain on the disposition of the property and, under certain circumstances, may be eligible to claim a loss as well. The tax treatment of he disposition may be affected by whether the debt was recourse or nonrecourse.

If the debt was nonrecourse (you were not personally liable for payment), the amount realized for purposes of computing gain is the sum of the amount of money received, the fair market value of any other property received incident to the transfer of the property subject to foreclosure, and the amount of any nonrecourse debt on the property. The difference between the amount realized and your basis is your gain or loss. No portion of the gain on property subject only to nonrecourse debt is income from discharge of indebtedness.

If the debt was recourse (you could have been held personally liable for payment), the proper treatment depends on the amount of the debt and whether you were discharged as a result of the transaction. If the debt was less than the fair market value of the property, the amount realized is equal to the sum of the amount received and the fair market value of any other property received incident to the transfer of the property subject to foreclosure, and the amount of any debt discharged as the result of the transaction. On the other hand, if the debt was more than the fair market value of the property and it was discharged as result of the transaction, for example, if you gave the creditor a deed in lieu of foreclosure, then the difference between the FMV of the property and the amount of the debt up to the FMV of the property is considered to be the amount realized and the excess debt is considered to be income from discharge of indebtedness. Your gain or loss would be computed by the difference between the FMV of the property and your basis; the balance would be ordinary income reportable on Line 21. If the debt was not discharged because of the foreclosure and the creditor could collect the difference from you, there would be no discharge of indebtedness income until such time as the debt was actually discharged or the statute of limitations expired. In such case, you might only have to report your gain on the disposition of the property.

References:

• Publication 523, Selling Your Home
• Publication 537, Installment Sales
• Publication 544, Sales and Other Dispositions of Assets
• Publication 908, Bankruptcy Tax Guide
• Form 982 (PDF), Reduction of Tax Attributes Due to Discharge of Indebtedness
• Form 1040 (PDF), U.S. Individual Income Tax Return
• Form 1040, Schedule D (PDF), Capital Gains and Losses
• Form 1099-A (PDF), Acquisition or Abandonment of Secured Property
• Form 1099-C (PDF), Cancellation of Debt
• Form 4797 (PDF), Sales of Business Property

If the special holding periods are met, generally treat gain or loss from the sale of the stock as capital gain or loss. However, you may have compensation income if:

The holding period requirement is that you must hold the stock for more than 2 years from the time the stock is granted to you and for more than 1 year from when the stock was transferred to you. If you do not meet these holding period requirements, there is a disqualifying disposition of the option. The compensation income that you should report in the year of the disposition is the excess of the fair market value of the fair market of the stock on the date the stock was transferred to you less the amount paid for the shares.

If the holding period requirement is met, but the option price is below the fair market value of the stock at the time the option was granted, you report the difference as compensation income (wages) when you sell the stock. Generally, this compensation income is the lesser of the excess of the fair market value on the date of the disposition less the exercise price OR the excess of the fair market value of the option when granted less the exercise price.

If your gain is more than the amount you report as compensation income, the remainder is a capital gain reported on Form 1040, Schedule D (PDF). If you sell the stock for less than the amount you paid for it, your loss is a capital loss, and you do not have ordinary income.

For more information, refer to Publication 525, Taxable and Nontaxable Income, and Publication 551, Basis of Assets.

References:

• Publication 525, Taxable and Nontaxable Income
• Publication 551, Basis of Assets
• Form 1040, Schedule D (PDF), Capital Gains and Losses

If you are able to defer the reporting of gain or loss until the year the short sale closes, the following will allow you to reconcile your Forms 1099-B to your Schedule D and still not recognize the gain or loss from the short sale:

For more on these rules and exceptions that may apply, refer to Chapter 4 of Publication 550, Investment Income and Expenses.

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

In general, you cannot determine your gain or loss until you purchase the stock that you are going to deliver to close the short sale. You still need to report the gross proceeds on Schedule D so that the total of lines 3 and 10, column (d), reconciles with all of your Forms 1099-B.

Also, in columns b and c write "short sale." In column f, write "see attached statement." In the statement, explain the details of the short sale and that it is not closed. Include your name as it appears on your return and your social security number.

For more information on rules and exceptions that may apply, refer to Chapter 4 of Publication 550, Investment Income and Expenses.

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

You do not normally have to report a return of principal (or return of capital) on your tax return. You must reduce your basis in the fund, which should be recorded in your records. However, basis cannot be reduced below zero. Once your basis reaches zero, any return of principal is capital gain and must be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses.

References:

• Publication 564, Mutual Fund Distributions
• Form 1040, Schedule D (PDF)

A mutual fund is a regulated investment company that pools funds of investors allowing them to take advantage of a diversity of investments and professional asset management. You own shares in the fund, but the fund owns assets such as shares of stock, corporate bonds, government obligations, etc. One of the ways the fund makes money for its investors is to sell these assets at a gain. If the asset was held by the mutual fund for more than one year, the nature of the income is capital gain, which gets passed on to you. These are called capital gain distributions, which are distinguished on Form 1099-DIV (PDF) , from income that is from other profits, called ordinary dividends.

Capital gains distribution are taxed as long term capital gains regardless of how long you have owned the shares in the mutual fund. If your capital gains distribution is automatically reinvested, the reinvested amount is the basis of the additional shares purchased.

References:

• Publication 564, Mutual Fund Distributions

Your Form 1099-DIV is correct, but so is your annual statement. For the purpose of reporting taxable income on your tax return, capital gain distributions are defined as long-term capital gains only. Short-term capital gains are taxed as ordinary income and are therefore treated as ordinary dividends on Form 1099-DIV (PDF) .

Box 1b of your Form 1099-DIV shows the portion of the amount in box 1a that may be eligible for the new 15% or 5% capital gain rates. See the Instructions for Form 1040 and Instructions for Form 1040A for how to determine the eligible amount and report this amount on line 9b of your, Form 1040 (PDF) Form 1040A (PDF) .

The short-term capital gains will be in box 1a "ordinary dividends" on 1099-DIV. These will be reported on line 9a of 1040/1040A.

Report the fund's short-term capital gains as part of your total ordinary dividends on line 9 of your Form 1040 or 1040A. (You may have to also report them on Form 1040, Schedule B (PDF), Interest & Dividend Income or Form 1040A, Schedule 1 (PDF), Interest and Ordinary Dividends . Refer to the instructions to the schedule.)

References:

• Publication 564, Mutual Fund Distributions

You cannot. You did not sell the assets that produced this income, the mutual fund did. All income that is taxed as ordinary income flows through to you as ordinary dividends, whether the income is from interest, dividends, or the sales of short-term capital assets.

In the same manner, you report capital gain distributions as long-term capital gains on your return regardless of how long you have owned the shares in the mutual fund. This is because the asset was held and then sold by, the mutual fund, not by you.

Report your total ordinary dividends (including the short-term capital gains in your mutual fund) on Form 1040, line 9a, or Form 1040A, line 9a, with your other ordinary dividends, if any. You may also have to file Form 1040, Schedule B (PDF) , Interest & Dividend Income or Form 1040A, Schedule 1 (PDF), Interest and Ordinary Dividends.

References:

• Tax Topic 409, Capital gains and losses
• Publication 550, Investment Income and Expenses

If you use the dwelling unit as a home (based on degree of personal use) and you rent it for fewer than 15 days during the year, do not include any of the rent in your income and do not deduct any of the rental expenses. If you do not meet the tests for using your timeshare as your home, the income is reportable on Form 1040, Schedule E (PDF), Supplemental Income and Loss.

References:

• Form 1040, Schedule E (PDF), Supplemental Income and Loss
• Publication 527, Residential Rental Property