Fund Information: Tax Center: FAQs
What is cost basis?
How do I calculate share cost?
I did not redeem any money from my account. Why did I receive a Form 1099-B?
What are capital gains and losses?
What is the difference between short-term and long-term gains and losses?
Why do mutual funds pay capital gains?
Are capital gains distributions paid by a tax-exempt fund treated as taxable income?
I have a tax-exempt fund. Do I have to report it on my state income tax?
Because my dividends were less than $10.00, I did not receive a Form 1099-DIV. How do I know how much to report?
Because I did not receive a Form 1099-DIV, do I still have to report my dividend income?
What do I need to do with the foreign tax paid amount on my 1099-DIV?
Why did I receive a Form 1099-R?
Do I have to attach Form 1099-R to my federal and state tax returns?
How do I know how much of the distribution is taxable on my 1099-R if there is no amount in box 2A?
Do I have to pay taxes on the full amount in box 2 of my 1099-B?
Why did I receive a Form 5498 and what do I do with it?
Do I have to attach Form 5498 to my federal and state tax returns?
What is cost basis?
Generally, cost basis is the purchase price of a security or share, including commissions and expenses, if applicable. Cost basis is used to determine if you have a capital gain or capital loss at the time you sell your shares. You must report capital gains and losses to the IRS for tax purposes.
When you sell or exchange shares, the transaction price is usually different from the original purchase price. If the selling price is greater than the purchase price, your profit is called a capital gain. If the selling price is less than the purchase price, your deficit is called a capital loss. When you are preparing your federal tax return, you must report capital gains and losses to the IRS.
How do I calculate share cost?
In order to determine a capital gain or loss when you sell or exchange shares, you need to calculate a share cost or cost basis. If you redeemed shares in your Principal Mutual Fund account you may receive a Cost Basis Statement to assist you in this calculation. The IRS allows you to choose one of four methods to determine this amount. Note: Once you select a method for a particular fund, you must use the same method for subsequent sales of shares of that fund.
I did not redeem any money from my account. Why did I receive a Form 1099-B?
For tax purposes, exchanges are treated just as if you had sold your shares in one fund and used the cash to purchase shares in another fund. Thus, the same tax rules that apply to calculating gains and losses when you redeem shares apply when you exchange them.
What are capital gains and losses?
In addition to gains distributed to you from the sale of securities in a fund’s portfolio, you also may have taxable gains from selling your fund shares. If you sell your shares for more than their original cost, you may have realized a capital gain. If you sell them for less, a capital loss may result. In general, any redemption or exchange of shares is considered a sale of shares.
What is the difference between short-term and long-term gains and losses?
Gains and losses on mutual fund shares held for one year or less are considered short-term; shares held for more than a year are deemed long-term. Short-term capital gains are included with your other ordinary income and are taxable at your marginal tax rate. Long-term capital gains are taxable as such (generally at a 15% tax rate).
Why do mutual funds pay capital gains?
As a mutual fund sells a holding, it receives any profit or capital gain that results from the sale. Mutual funds, by law, must pay essentially all gains to their shareholders in capital gains distributions. These distributions, which commonly happen once a year, are made fundamentally for tax reasons.
Are capital gains distributions paid by a tax-exempt fund treated as taxable income?
Yes. Capital gains distributions from a tax-exempt fund are treated as taxable income. In the event of a capital gains distribution, a 1099-DIV is sent indicating the distribution as taxable income.
I have a tax-exempt fund. Do I have to report it on my state income tax?
Yes. The tax-exempt funds are exempt from federal taxes only. However, a portion of a tax-exempt dividend may be state tax exempt, depending on the state in which you reside. Please refer to the state listing in the tax reporting supplement enclosed with your 1099's.
Because my dividends were less than $10.00, I did not receive a Form 1099-DIV. How do I know how much to report?
Your year-end statement will have the amount of dividends that were paid to you throughout the year.
Because I did not receive a Form 1099-DIV, do I still have to report my dividend income?
Yes, if you have a tax-exempt fund, the dividends are federally tax exempt and Principal Funds does not report these to the IRS. However, these dividends should be reported on Form 1040. In addition, you will have to report them on your state tax return. You will need to use your year-end statement to find the amount paid to you.
What do I need to do with the foreign tax paid amount on my 1099-DIV?
Some funds that invest in foreign stocks and meet certain requirements elect to pass through foreign taxes to their shareholders. In these funds, a gross dividend is reported to each shareholder, and the recipient is allowed to offset that income with a credit based on foreign taxes paid by the fund. This credit is subject to limitations and can make tax reporting complex. Please contact your tax advisor for questions regarding your foreign tax paid credit. A letter stating all foreign tax amounts of Principal Funds is mailed with your 1099-DIV.
Why did I receive a Form 1099-R?
You received the Form 1099-R because you received a distribution from your Principal Funds IRA. This transaction is treated as a taxable event. Generally, IRA distributions are treated as taxable income for the year in which the distribution is received.
But I reinvested this into another IRA? (three possible answers depending on the situation)
- Distributions from a traditional IRA are taxable to the shareholder unless the money is rolled over into another traditional IRA within 60 calendar days of the date the shareholder receives the money.
- If a shareholder has a rollover IRA and requests a direct rollover to another qualified account that the monies originated from the shareholder would receive a 1099-R with the distribution code of "G." This type of distribution is not taxable to the shareholder.
- If a shareholder removes an excess contribution from his or her IRA prior to his tax filing deadline plus extensions, only the earnings are taxable. The distribution is reported on the 1099-R but the earnings are the only portion that is reported as taxable.
Do I have to attach Form 1099-R to my federal and state tax returns?
Yes. You must attach Form 1099-R to your federal and state tax returns.
How do I know how much of the distribution is taxable on my 1099-R if there is no amount in box 2A?
You will want to note that Box 2b has been checked "Taxable amount not determined." Tax laws have permitted IRAs to hold nondeductible contributions since January of 1987. Nondeductible contributions are made using income which has already been taxed. For IRAs funded with deductible and nondeductible contributions, special rules apply when figuring the tax on distributions. Note: See IRS Publication 590 for additional information.
Do I have to pay taxes on the full amount in box 2 of my 1099-B?
In order to determine a capital gain or loss when you sell or exchange shares, you need to have two figures: The beginning value and the ending value. The ending value is simply the price at which shares are redeemed. The beginning value isn't necessarily the purchase price because it can change over time through various transactions. You need to calculate a share cost or cost basis. This will determine your gain from selling or your loss from selling.
Why did I receive a Form 5498 and what do I do with it?
Principal Funds is required to provide you with a statement of your account's fair market value as of December 31 if you have reportable activity. Form 5498 is mailed by May 31.
Do I have to attach Form 5498 to my federal and state tax returns?
No. You will not have to attach Form 5498 to your federal and state tax returns.
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