Education & Support Resources

Questions and Answers

Q: Can I use the information on my last account statement of the year to file my tax return?
Q: What accounts are included on the MFS Tax Form Summary?
Q: Why did I receive a 1099-DIV for a tax-exempt fund?
Q: What is the difference between the capital gain distribution paid by a fund and the capital gain or loss realized on the sale of fund shares?
Q: I paid a tax when my fund made a capital gain distribution and now must pay tax because I realized a gain upon selling my shares of the fund. Aren’t I being taxed twice?
Q: What is qualified dividend income?
Q: Is the MFS Average Cost Statement adjusted to reflect sales charges paid?
Q: For what accounts does MFS issue an average cost statement?
Q: What if I have already used another method to compute the cost basis of my shares?

Q: Can I use the information on my last account statement of the year to file my tax return?

A: No. Your account statement reports distributions for accounting purposes. It may differ from the information required for federal tax purposes. Distributions subject to federal income tax are reported only on Form 1099-DIV. If you own a tax-exempt fund, distributions are reported on Form 1099-INT.

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Q: What accounts are included on the MFS Tax Form Summary?

A: Any account that earned $10 or more in federally taxable distributions or from which federal tax has been withheld will receive a Form 1099-DIV. Excempt-interest dividends are now reportable on Form 1099-INT. Accounts with the same taxpayer identification number (TIN) and address are combined on the Tax Form Summary. The IRS does not require that these forms be issued for certain accounts. Examples of such exempt accounts include IRAs, qualified pension and profit-sharing plans, and accounts owned by certain institutions. In addition, Form 1099-B is not issued for accounts invested in money market funds. If you believe you have an exempt account and you received a 1099 form, please contact us.

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Q: Why did I receive a 1099-DIV for a tax-exempt fund?

A: A tax-exempt fund may realize some capital gains or losses as a result of certain transactions, including options and futures transactions. Capital gain distributions are federally taxable. For some bonds purchased at a discount after April 30, 1993, some or all of the gain is taxed as ordinary income rather than as a capital gain. In addition, distributions of income derived from investments in taxable securities, including repurchase agreements and a portion of the discount relating to certain stripped tax-exempt bonds and their coupons, are taxable.

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Q: What is the difference between the capital gain distribution paid by a fund and the capital gain or loss realized on the sale of fund shares?

A: During a fund’s fiscal year, it buys and sells securities. If, at the end of the year, there is a net gain, it is passed on to shareholders in the form of a capital gain distribution. This distribution is taxable and is reported in Box 2A of Form 1099-DIV.

A capital gain or loss on your shares occurs when you sell or exchange fund shares. If you sell your shares for more than your cost, you will realize a capital gain. The proceeds of transactions that may produce a capital gain or loss are reported in Box 2 of Form 1099-B.

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Q: I paid a tax when my fund made a capital gain distribution and now must pay tax because I realized a gain upon selling my shares of the fund. Aren’t I being taxed twice?

A: No. You must pay income tax on dividend and capital gain distributions in the year you receive them. When you sell your shares for more than you paid for them, you must also pay tax on the gain. However, when you compute the amount of your gain, any reinvested dividends or reinvested capital gain distributions will increase your total cost basis (the cost of your shares) and thus will reduce your gain.

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Q: What is qualified dividend income?

A: These are dividends paid to the fund during the tax year from domestic corporations and qualified foreign corporations.  These dividends are now taxed at rates of 15% or 5% depending on your taxable income bracket.  Please refer to the IRS 1040 Instructions for more details.

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Q: Is the MFS Average Cost Statement adjusted to reflect sales charges paid?

A: Yes. Any front-end sales charge paid, as well as any contingent deferred sales charge, is reflected in the average cost per share.

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Q: For what accounts does MFS issue an average cost statement?

A: The MFS Average Cost Statement will be provided for certain accounts that were opened after January 1, 1990, and had a redemption or an exchange during the current tax year.

There are, however, certain exceptions. MFS cannot provide an average cost statement for accounts that do not realize a gain or loss on the redemption or exchange of shares. Examples include money market funds and retirement plan accounts. The MFS Average Cost Statement also is not issued for accounts that received shares as a result of a transfer unless you provide MFS with the cost-basis information needed for the calculation. Finally, we cannot provide the statement for any account with certificate shares because all shares must be held on deposit to use the average cost method of calculation.

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Q: What if I have already used another method to compute the cost basis of my shares?

A: If you used a method other than average cost to calculate the cost basis for a particular fund, you can change the method of computation, but you cannot use the information provided in the MFS Average Cost Statement because the statement assumes that all previous computations were made using the average cost - single category method. Once you have elected to use an average cost method for a particular fund, you cannot change to any other method without first obtaining IRS approval.

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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.