Simplifying Tax Time for Investors

For many Americans, the date April 15 conjures feelings of anxiety or even dread. Often, what causes these unpleasant feelings is not just the financial pain of paying taxes but also the insecurity of not knowing the rules as far as what income and investments are taxable.

This guide is meant as a starting point to understanding your federal tax responsibilities. State tax laws vary and are not addressed here.

Tax-deferred accounts, such as IRAs

If your money is in an individual retirement account (IRA), your account earnings are tax-deferred or tax-free, depending on the type of IRA you have. That means you will not have to pay any tax until you make a withdrawal from the account.

If you have a Traditional or Rollover IRA and took money out of that account, you will owe income tax on the amount you withdrew, called a “distribution.” If you funded your IRA with non-tax deductible contributions then only the earnings are taxable. Furthermore, if you had not reached the qualified retirement age (59 ½, as defined by the government) when you made the withdrawal, you may face a 10% tax penalty on the amount withdrawn.

If you have a Roth IRA and took money out of your account, your distribution is tax- and penalty-free, provided you are age 59 ½ or older and your account was open for at least five years. Other exemptions may include disability, the first-time purchase of a home or a beneficiary distribution due to death.

If you are retired and have a Traditional or Rollover IRA, the government requires you to start taking money from your IRA the year you reach age 72. Homestead Funds will send you a reminder when it’s time to start taking these Required Minimum Distribution (RMD) payments. Roth IRAs are not subject to the same Required Minimum Distribution payments, unless the account is inherited by a non-spousal beneficiary.

Taxable accounts

If your money is in a regular taxable account, you’ll owe taxes on the amount of money your fund earned for you. A fund’s earnings are distributed to shareholders in the form of income or capital gains, which are either paid to you in cash or automatically reinvested in your account. Your share of any Homestead Funds income distributions will be reported to you on Form 1099-DIV, sent to you in January.

Also, if you sold shares or made an exchange from one fund to another, you’ll need to determine if your transaction resulted in a capital gain or loss and the amount of any taxes due. To calculate this, you’ll need to know the cost of the shares that you sold, called your “basis,” as well as the sale price and your holding period. Your year-end account statements include purchase and sale prices for all of your fund transactions in any given year. Once you have your statements in hand, you can refer to IRS Publication 551, Basis of Assets, or see your tax professional to calculate your cost basis and determine any tax due.

Save all of your year-end mutual fund statements. You’ll need these to calculate your cost basis if you own taxable accounts.

Forms and paperwork you will need to file your taxes

While gathering the necessary forms and documents for tax time may feel like a burden, thanks to technology most of what you’ll need is available on the Internet or is a phone call away. Here are the papers you’ll want to have handy at tax-filing time:

• Homestead Funds’ year-end statements. You may need to refer to current and prior year statements when calculating your cost basis so you can determine the amount of tax you owe as a result of selling or exchanging shares held in taxable accounts.
• IRS Form 1099-DIV, which Homestead Funds sends to you at the end of January, reports any dividends or capital gains earned by your funds. Mutual funds are required to pass these distributions through to shareholders. For investors in taxable accounts, these distributions — whether paid or reinvested — are generally taxable to you in the year earned.
• IRS Form 1099-B reports proceeds from any sale or exchange of fund shares held in a taxable account. Refer to this form plus your year-end account statements to calculate your basis and determine the amount of any tax due. Homestead sends this form in mid-February.
• IRS Form 1099-R reports any distribution taken from an IRA or other type of retirement account and the amount withheld for payment of federal or state income tax. Homestead sends this form in mid-February.

View tax forms online

If you misplaced any of these tax forms, log in to your account at homesteadfunds.com. Tax forms are posted online after they are mailed to shareholders and available for you to download.

Helpful Resources

Homestead Funds is here for you. If you need a duplicate statement or tax form mailed to you, call one of our friendly associates at 800.258.3030. Please allow us a few weeks to retrieve and mail this information to you.

The Internal Revenue Service has a comprehensive website with forms and explanatory publications you can download. You may also be eligible to file your federal taxes electronically free of charge if you go to the IRS website at irs.gov