Frequently Asked Questions

What are the contribution limits for IRAs?

Traditional and Roth IRAs

*Individuals who reach age 50 before the end of the year may begin to make "catch-up" contributions.

 

What are the contribution limits for Coverdell Education Savings Accounts?

The contribution limit for Coverdell Education Savings Accounts (ESAs, formerly known as "Education IRAs") is $2,000. Contributions for tax year 2014 can be made through April 15, 2015.

 

So what exactly is a capital gain?

There can be two sources of capital gains for a mutual fund shareholder:
  • Gains from Distributions
    Capital gains realized by the fund on sales of its portfolio securities are "passed through" to shareholders as distributions. These amounts are reported to you by the fund on Form 1099-DIV. Short-term capital gains are included in box 1a of Form 1099-DIV. Long-term capital gains are identified on Form 1099-DIV, box 2a.
  • Gains from Sales
    If you sell or exchange your mutual fund shares, you must pay tax on any gains arising from the sale, just as you would from a sale of individual securities. Shares that are held one year or less are considered short-term and are taxable at the shareholder's income tax rate. Shares held for more than 12 months are considered long-term and taxable at a reduced rate.

    Redemptions of mutual fund shares are reported to you on Form 1099-B. Remember that redemptions from municipal bond funds are taxable transactions.

 

What are the tax rates on dividends and capital gains?

1Qualified dividends only; subject to holding period and other requirements.

 

How do I know which tax bracket I fall into?

The following table shows the income breakdown of each tax rate for both single and married tax filers in 2014 and 2015:

 

Why would I have to pay tax on a capital gain distribution when my fund's share price has decreased?

Capital gain distributions occur independently of price fluctuations in a fund. A mutual fund is required to distribute annual income and/or capital gains to its shareholders. At the same time, changes in financial markets can cause the price of fund shares to go up or down.

 

Do I pay taxes on reinvested dividends?

Yes, reinvested distributions are taxed the same as cash distributions.

 

What are the tax implications of a municipal fund investment?

  • Tax-Free Funds Information
    Tax-free funds are mutual funds whose income dividends are earned from bonds issued by a municipality and are generally exempt from federal income tax. A portion of the federally exempt interest dividends from some state-specific tax-free funds may be exempt from state income tax, especially if you live in the state of issue.
  • State-Specific Tax-Free Funds Information
    State-specific tax-free funds are mutual funds whose income dividends are earned from bonds issued by a municipality in a particular state and are generally exempt from federal and that state's income tax. A portion of the federally exempt interest dividends from some state-specific tax-free funds may be exempt from state income tax, especially if you live in the state of issue. Income from territorial obligations (Guam, Puerto Rico, and the U.S. Virgin Islands) is generally exempt from both federal and state personal income taxes.
  • Capital Gain Distributions
    Capital gains may be realized by the fund and passed through to the shareholder as distributions. All capital gains are taxable and will be reported to you on Form 1099-DIV.

 

Are there other potential tax consequences with municipal fund investments?

  • U.S. Government Holdings
    A mutual fund whose income dividends are earned from U.S. Treasury and certain other government securities may be categorized as a fund containing U.S. government obligations. Income from mutual fund investments in U.S. government obligations may be exempt from state personal income taxes. Some states, such as California, Connecticut, and New York, impose restrictions on the fund's ability to pass through to you the exempt nature of this interest income.

 

I've redeemed shares from my account. What do I need to know about calculating my cost basis?

First, review our Cost Basis article. Once you've chosen one of the methods, keep these key points in mind:
  • Reinvested dividends or capital gain distributions add to the cost basis of your shares. These dividends purchase shares. Your confirmation statements show you the number of shares purchased and the price of those shares.
  • Return of capital gain distributions reduces the cost basis of your shares. If the fund distributes a return of capital, it will report this amount to you in box 3 of Form 1099-DIV at the end of the year.
  • The average cost method is available for mutual funds. It is generally not acceptable for sales of other investments, such as individual stocks and bonds. Different methods may be used for different funds.
  • Transfers of shares due to gifts or inheritance may require different cost basis calculations. In these situations, please consult your tax advisor before using this cost basis statement.
  • If you sell shares at a loss and purchased shares in the same fund within 30 days before or after the sale, the IRS considers it a "wash sale" transaction and the loss must be deferred for tax purposes. The rules for wash sales can be very complex. It is recommended that you consult a tax advisor if you suspect you are in this situation.

For more information on any of these topics, refer to Internal Revenue Service Publication 550, Investment Income and Expenses.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

Stock fund values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond fund values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. In general, when interest rates rise, bond fund values fall and investors may lose principal value. Some funds, including nondiversified funds and funds investing in foreign investments, high-yield bonds, small- and mid-cap stocks, and/or more volatile segments of the economy, entail additional risk and may not be appropriate for all investors. Consult a fund's prospectus for additional information on these and other risks.

A portion of the fund's income may be subject to federal, state, and/or local income taxes or the alternative minimum tax (AMT). Any capital gains distributions may be taxable.

Any tax or legal information in this website is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. Wells Fargo Funds Management, LLC, Wells Fargo Funds Distributor, LLC, nor any of their representatives may give legal or tax advice.

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