Fund Investor, Meet Schedule D
NEW YORK — Linda Quade has a $4,658 problem.
That's how much the resident of Montrose, Colo., reaped last November when she sold shares in Pax World Fund, a "socially responsible" mutual fund that she first bought into in 1984.
The good news: Thanks to new rules from federal lawmakers, the tax on her profits will be lower than if she had sold the shares before May 7, 1997.
The bad news: Those same new rules have Ms. Quade scratching her head. Facing an April 15 filing deadline, she's looking at Schedule D - which covers the capital-gains tax - and wondering where to start.
Millions of taxpayers find themselves in similar straits this spring.
And not just those who sold investments.
For the first time, Schedule D must be filed for the capital gains (profits) that many mutual funds distribute annually to shareholders.
Until this year, if such distributions were the only profits you made from investments, you could skip Schedule D and report them along with dividends.
Now it's a new ballgame.
"Figuring out what's due on investments is going to be very tricky for a lot of taxpayers this season," says a financial adviser here. "The best advice," he says, "is to start your tax preparation early and get as much detail as you can from your mutual fund companies."
The changes to 1997 capital-gains rates are significant.
Capital gains are the profits made on the sale of a stock, bond, or other asset. When a mutual fund sells a stock from its portfolio, the gain or loss is passed along to shareholders.
The new rules lay out three basic categories of capital gains:
Short-term gains. These are profits on assets held less than a year. As in previous years, these are taxed at the same rate as ordinary income such as wages or dividends.
Long-term gains. These are profits on assets held longer than 18 months (the old limit of 12 months applies to assets sold before July 29 last year). Congress lowered the maximum tax rate, from 28 percent to 20 percent, for sales made May 7 or later. For people in the 15-percent income-tax bracket, these gains are taxed at 10 percent.
Midterm gains. This new category is for profits on assets held 12 to 18 months, sold July 29 or later. The top rate is 28 percent - the same as the former top rate on long-term gains.
So if you sold an investment, the tax you pay depends on:
* When you sold it.
* How long you held it.
Study your tax instructions, including a special booklet on Schedule D, carefully.
And if you received a distribution from a mutual fund, you must find out what portion of the gains fall into each of the three reporting categories.
Unfortunately, not all mutual-fund companies are giving fund holders the full story.
Many companies are explaining it, but not on their basic 1099-Div forms. Be ready to read the fine print in supporting documents and call the fund company if you're unsure.
As an example, here's how the Pax World Fund breaks down the gains distribution it made in December: 61 cents per share taxable at old rates, and $1.02 per share at new rates.
How To Get Help
* To get a form or tax publication from the IRS, call 800-TAX-FORM (800-829-3676.) To get forms by fax, call (703) 368-9694.
* For IRS tax assistance by phone, call 800-829-1040. Be prepared to wait. For problem solving, if other IRS sources have failed to help, ask for "PRP." For automated refund assistance, call 800-829-4477. Walk-in assistance is offered at 400 IRS offices nationwide.
* Consult a tax guidebook, available in libraries and bookstores. "J.K. Lasser Income Tax Guide" ($24.95) is one of the best.
* Go to a library for tax forms or IRS Publication 17, which walks through a typical return.
* Log onto some of these Web sites: the IRS (www.irs.ustreas.gov), tax advisers Ernst & Young (www.ey.com), H&R Block (www.hrblock.com/tax/), J.K. Lasser (www.jklasser.com/toc.html), or TaxLogic (www.taxlogic.com).
AND HOW TO HELP YOURSELF
* Write a tidy return; sloppy ones are more likely to trigger an audit.
* Double-check your math.
* Write your Social Security number on your payment.
* Make sure name, address, and Social Security number are correct on your peel-off label. If not, correct them.
* Sign and date the 1040 form; note your occupation.