Reporting of 2011 Mutual Fund Distributions and Sale/Redemption of Fund Shares

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1 Reporting of 2011 Mutual Fund Distributions and Sale/Redemption of Fund Shares Tax preparation assistance: How to use Forms 1099-DIV and 1099-B when you file your tax return

2 This brochure explains how to report information from the enclosed Forms 1099-DIV and 1099-B on your tax return (Form 1040 or 1040A). How to use Form 1099-DIV Dividends and capital gain distributions from taxable mutual fund accounts Schedule B (Interest and Ordinary Dividends) If the total of all the ordinary dividends (Box 1a) received in 2011 from all your investments is more than $1,500, you must list each source of your ordinary dividend income on Schedule B of Form If the total of all ordinary dividends received in 2011 from all your investments is $1,500 or less, you must report it on Line 9a of Form 1040 or 1040A. Schedule D (Capital Gains and Losses) You must report total capital gain distributions (Box 2a) from mutual funds on Schedule D of Form 1040, unless both of the following exceptions apply: 1. The only amounts you have to report on Schedule D are capital gain distributions from Box 2a of your Forms 1099-DIV. 2. None of your Forms 1099-DIV have an amount in Box 2b (Unrecaptured Section 1250 gain), Box 2c (Section 1202 gain), and Box 2d (Collectibles [28%] gain). If you aren t required to file Schedule D, enter your total capital gain distributions (Box 2a) from all your investments on Line 13 of Form 1040 and check the box on that line or enter them on Line 10 of Form 1040A. You also must complete a Qualified Dividends and Capital Gain Tax Worksheet included in the Form 1040 or 1040A instructions to determine your tax due on these amounts. 1

3 Box 1a (Total ordinary dividends) Box 1a shows total ordinary dividends, including short-term capital gain distributions by fund from your taxable Vanguard mutual fund accounts. Box 1b (Qualified dividends) Box 1b shows the portion of the amount in Box 1a (Total ordinary dividends) that is QDI-eligible for the reduced 15% or 0% tax rate. To claim the reduced tax rate for QDI reported in Box 1b, you must have held your fund shares for at least 61 days during the 121-day period beginning 60 days prior to the ex-dividend date. (Also known as the reinvest date, the ex-dividend date is when the fund s net asset value is adjusted to account for distributions.) Your personal QDI is the QDI reported to you in Box 1b, reduced, if necessary, by dividends for which you didn t meet the holding-period requirement. For example, if a fund s ex-dividend date was June 19, 2011, shares would have to have been held for at least 61 days between April 20, 2011, and August 18, 2011, to qualify as QDI for that distribution. If the shares don t meet the holding-period requirement, dividends paid on those shares don t qualify for the lower tax rates. Vanguard doesn t mail personal QDI statements to shareholders. For help in determining your personal QDI, visit the Tax Center on vanguard.com to use the Calculate your qualified dividend income tool, which can calculate qualified dividend income generated by your taxable Vanguard mutual fund shares. Box 2a (Total capital gain distributions) Box 2a shows the long-term capital gain distributions by fund from your taxable Vanguard mutual fund accounts. See the example in this brochure. 2

4 What are qualified dividends? Distributions from U.S. corporations and certain foreign corporations are eligible for reduced tax rates as qualified dividends. Mutual funds may distribute qualified dividend income (QDI) to shareholders. Stock and balanced funds are likely to distribute QDI; money market and bond funds don t distribute QDI and, therefore, aren t eligible for lower tax rates. REIT Index Fund Form 1099-DIV mailed in February If you re a shareholder of Vanguard REIT Index Fund, you shouldn t file your federal or state income tax returns until you receive your Form 1099-DIV from Vanguard REIT Index Fund, which Vanguard mails (with IRS approval) in February. REITs generally can t calculate their taxable earnings until after the end of the tax year. For this reason, Vanguard seeks an extension from the IRS each year to mail completed Forms 1099-DIV for the REIT Index Fund after the normal deadline of January 31. Filing your tax returns prior to receiving the Form 1099-DIV for REIT Index Fund may require filing amended returns and may result in the payment of additional taxes. 3

5 Reporting mutual fund distributions In this example, the investor is required to file Schedule D and has received the following distributions from the XYZ Fund: $4, in ordinary dividends, as shown in Box 1a (Total ordinary dividends). The investor reports amounts shown in Box 1a on all Forms 1099-DIV from all sources separately, by fund, on Line 5 of Schedule B (Form 1040 or 1040A). $2, in QDI, as shown in Box 1b (Qualified dividends). The investor reports the sum of all QDI shown in Box 1b on all Forms 1099-DIV on Line 9b of Form 1040 or 1040A, assuming that the investor meets the QDI holdingperiod requirement, as described above. $2, in long-term capital gains, as shown in Box 2a (Total capital gain distributions). The investor reports the sum of all long-term capital gain distributions from all sources on Line 13 of Schedule D. 4 5

6 A note about Vanguard Brokerage Services tax statements You may notice a difference in when you receive your Tax Information Statement(s) from Vanguard Brokerage Services and any tax forms associated with Vanguard mutual fund holdings. The IRS has granted Vanguard Brokerage an extension that permits the mailing of statements for nonretirement brokerage accounts through the end of February. Vanguard Brokerage will mail Tax Information Statements (also known as Forms 1099 Consolidated) based on the activity in your account. As a result, tax forms for your Vanguard mutual fund accounts will generally be available before your brokerage forms. Forms 1099-R for retirement brokerage accounts will be mailed and available online by January 20, For nonretirement brokerage accounts, Tax Information Statement(s) will be mailed and available online by the end of February The delayed mailing is an effort to reduce the number of revised Tax Information Statements resulting from income reclassifications by securities issuers and to comply with cost basis legislation changes. See the Key availability dates for your 2011 tax forms in the Tax Center on vanguard.com for a full listing of tax forms and their availability. Note: You ll be able to download tax information for your Vanguard Brokerage account into TurboTax when your Tax Information Statement is mailed and available. Vanguard Brokerage Services is a division of Vanguard Marketing Corporation, member FINRA. Turbo Tax is a trademark of Intuit Inc., registered in the United States and other countries. 6

7 How to use Form 1099-B Capital gains or losses from the sale/redemption of mutual fund shares If you sold shares from your taxable Vanguard mutual fund accounts during 2011, you may have realized a capital gain or loss that must be reported on the new IRS Form 8949 and on Schedule D of Form The gross proceeds from that sale will be reported to you on Form 1099-B, along with instructions on how to calculate and report the gain or loss on Forms 8949 and Schedule D.* Net long-term capital gains realized from the sale of mutual fund shares are subject to a tax rate of 15% (0% for lower income tax brackets). Note, however, that net short-term capital gains realized from the sale of mutual fund shares held for one year or less are taxed at ordinary income rates. Form 1099-B lists only your account redemptions and the gross proceeds for each sale of fund shares. To complete Form 8949 and Schedule D, you must report your gross proceeds as well as cost basis, holding period for the shares sold, and gain or loss. Separate from Form 1099-B, Vanguard provides an Average Cost Summary that includes (in most cases) the capital gain or loss information you need to complete Form 8949 and Schedule D. Vanguard uses the average cost method to arrive at an average cost for all fund shares held in your account up to and including the redemption date. While this is a commonly used, IRS-approved method for calculating the cost of shares redeemed, you can choose other calculation methods that may be more beneficial or appropriate for you. For more information on tax reporting and calculating tax cost basis, see IRS Publication 550, Investment Income and Expenses, at the IRS website (irs.gov), or consult with a tax professional for additional guidance. * Shareholders in money market funds generally won t realize a capital gain or loss and won t receive a Form 1099-B. 7

8 Reporting requirement for tax-exempt interest dividends If you received tax-exempt interest dividends in 2011, Vanguard will report this amount on Form 1099-INT. Tax-exempt interest dividends paid after December 31, 2005, are reported on Form 1099-INT as required by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), which was enacted into law on May 17, Refer to Vanguard s update entitled Reporting of 2011 Tax-Exempt Interest Dividends on Form 1099-INT for information on reporting tax-exempt interest dividends on your tax return. Our Tax Center is your one-stop source for Vanguard tax-related information, forms, and links to handy tools, such as our Calculate your qualified dividend income tool. vanguard.com/taxcenter