Undistributed Capital Gains

Some mutual funds and REITs keep their long-term gains and pay tax on them, rather than distributing them to shareholders. If you've invested in one of these, you'll receive an IRS Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains. Attach Copy B to your Form 1040.

Your undistributed capital gains will appear in Box 1a of the Form 2439, and it will be reported on Line 11 of Schedule D. You can claim a tax credit for the amount of tax paid by the fund or REIT on Line 70 of your Form 1040. Just check Box "a" indicating that the payment was shown on Form 2439.

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You should also keep a copy of Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains in your records, so that when you sell the investment, you can increase its tax basis by the difference between the gain you reported over the years, and the tax credit you claimed. If you do, it will reduce the amount of capital gains you report for the sale.

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Note that beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.