Members of the Maryland Association of Certified Public...

Tax questions

March 14, 1997

Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.

Q: We bought shares of a mutual fund in early December; the fund company has sent us a 1099 reporting what the fund earned for the entire year. I thought I had to pay only for dividends it earned in December, but when I called, the company said that's how mutual funds are. Can you explain?

A: Dividends are declared by a mutual fund and paid to its shareholders as of a particular record date. If you are a shareholder as of that record date, then you will be paid that dividend and it will be taxable income to you. Any dividends declared and paid for a record date before you owned the shares is not income to you, since you did not receive it.

Mutual funds generally pay two types of dividends: ordinary and capital gain dividends. The capital gain dividends are generally paid in December and reflect the growth in the holdings of the mutual fund during the year. If you owned the mutual fund on the record date for the payment of the capital gain dividend, then the dividend is taxable to you, regardless of the fact that you did not own it for the entire year.

The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary.

To ask a tax question, call Sundial at 410-783-1800. Call 268-7736 in Anne Arundel County, 836-5028 in Harford County and 848-0338 in Carroll County. Using a Touch-Tone phone, punch in the four-digit code 6225 after you hear the greeting.

Readers also can e-mail questions through The Sun's Web site -- www.sunspot.net.

Selected questions will be answered in the Business section. No questions will be answered by phone.

Pub Date: 3/14/97

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