Glossary of Tax Terms

  • Alternative minimum tax (AMT) - AMT may apply to taxpayers who have certain tax preference items (for example, interest from municipal bond obligations) or who have substantial deductions and credits for expenses.  You should consult your tax adviser to determine if you would be subject to AMT.
  • Backup withholding - If a fund has not received a shareholder’s certified taxpayer identification number (TIN), or if an investor is subject to backup withholding for other reasons, the IRS requires that withholding tax be applied to federally taxable dividends, capital gain distributions, and the proceeds of redemptions and exchanges (except from money market funds).
  • Capital gain distribution - A distribution to shareholders of net long-term capital gains realized by a fund on the sale of its securities.
  • Cost basis - The price paid to purchase shares. Cost basis is adjusted for reinvested ordinary dividends and capital gain distributions, return of capital distributions, wash sales, and sales charge deferrals. The IRS allows taxpayers to choose among four methods to compute the cost basis of shares that have been acquired at various times and various prices: specific share identification, first-in first-out (FIFO), average cost basis - single category, and average cost basis - double category.
  • Exempt interest dividend - A distribution to shareholders from tax-exempt interest earned by a fund.
  • Foreign tax credit - A fund that has paid income taxes to foreign governments and satisfies certain requirements may pass through to its shareholders the ability to take either the foreign tax credit or the deduction for foreign taxes paid. If your fund paid taxes to foreign governments, you may be able to claim a deduction or tax credit to avoid double taxation on that amount. Consult your tax adviser for additional information.
  • Long-term capital gain or loss - A gain or loss on the sale or exchange of a security (including mutual fund shares) that has been held for more than one year.
  • Nominee recipient - A shareholder whose TIN appears on a Form 1099-DIV that includes amounts belonging to another person. If you are a nominee recipient, you must file Form 1099-DIV with the IRS for each of the other owners to show their share of income and you must furnish a Form 1099-DIV to each. A husband or wife is not required to file a nominee return to show amounts owned by the other.
  • Non-resident alien (NRA) withholding - The IRS requires that 30% be withheld from ordinary dividends and short-term capital gain distributions in accounts owned by nonresident aliens unless a lower rate is permitted by tax treaty and proper certification has been filed with the fund.
  • Ordinary dividend - A distribution to shareholders that is comprised of net taxable investment income and net short-term capital gains realized by a fund on the sale of its securities.
  • Qualified dividend income - The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces tax rates on "qualified dividend income" from common stock, certain preferred stock, and certain qualified foreign corporation stock subject to a holding period and hedging requirements. Interest from bonds and other fixed-income instruments, although they are reported as "dividends" on Form 1099-DIV, are not treated as qualifying income. The portion of the federally taxable dividends that qualify for reduced tax rates of 5% or 15% (depending on the shareholder’s overall taxable income) is identified in Box 1b of Form 1099-DIV. Qualified dividends in Box 1b are eligible for a reduced rate providing the shareholder meets certain holding period requirements.
  • Return of capital distribution - A distribution in excess of a fund’s earnings. A return of capital distribution is generally a nontaxable distribution that reduces a shareholder’s cost basis in shares of a mutual fund.
  • Short-term capital gain or loss - A gain or loss on the sale or exchange of a security that has been held one year or less. Net short-term capital gains (short-term gains minus short-term losses) realized by a fund when it sells securities are taxed as ordinary dividends.
  • Tax deferred - Investment earnings that will be subject to federal income tax at some later date. For example, reinvested earnings from retirement plans, such as IRAs or pension plans, are tax deferred and will be subject to income tax when distributed to the participant.
  • Tax exempt - Income that is not subject to federal income tax, such as interest from state and municipal bonds. Tax-exempt income may be subject to state taxes.
  • Wash sale - When shares of a fund are exchanged or redeemed at a loss and shares of the same fund are repurchased within the 61-day period beginning 30 days before and ending 30 days after the redemption or exchange.
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