Your first step in determining any investment-related taxes you may owe is to determine whether your accounts are tax-deferred, like an IRA, or whether you have a regular taxable account. It’s a good idea to save your year-end account statements.
You’ll want them to track your account values and, for any accounts where taxes may be owed, you will need to refer to them at tax time. Also, if you make a transaction that is a taxable event or your account earns interest or dividend income, Homestead Funds will report this activity to you and the IRS. Keep these tax forms with your statements or log in to your account to view tax form information online.
Tax-Advantaged Account Basics
If your money is in an IRA, your account earnings are tax-deferred or tax-free, depending on the type of IRA you have. That means that your account is not subject to income tax until you make a withdrawal. Distributions from IRAs may be subject to taxes and, if taken before age 59 ½, a 10 percent premature distribution penalty.
Beginning in 2013, some states require mutual funds to withhold state taxes on IRA account redemptions if shareholders elect to have federal income tax withheld or if the state’s requirement is independent of federal withholding. Each state’s minimum mandatory withholding amount is different.
Mandatory tax-withholding states:
|District of Columbia|
We also have the ability to withhold state taxes in voluntary states:
*Georgia withholding will automatically be calculated for systematic distributions when federal withholding is requested, but the shareholder may elect not to have state taxes withheld. Please contact us at 800.258.3030 for instructions on how to opt out. Opting out of state tax withholding does not exempt you from paying state taxes. State tax withholding is not allowed in any other state not listed above.
Taxable Account Basics
If your money is in a regular, taxable account, you’ll owe tax on fund distributions (including income, dividends and capital gains paid or reinvested in your account). Also, when you sell or exchange fund shares, you’ll have to calculate your cost basis to determine the amount of any profit or loss.
Cost basis is generally the price paid for your shares, adjusted for return of capital, certain corporate actions, and any sales charges or transaction fees. Cost basis is an important calculation used to determine gains and losses on any shares sold in a taxable (nonretirement) account. This information is required to prepare a tax return. Homestead Funds will report summary cost basis information to you on your quarterly and year-end statements, and you will receive a Form 1099-B showing sales proceeds for each closing sale transaction. Basis information will be reported along with the calculated gain or loss on the trade. The gain or loss will be classified on the form as short-term or long-term based on the acquisition date of the security. The information reported to you on Form 1099-B will also be reported to the IRS.
Homestead Funds does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.