Dividends in funds
QWhen a stock in a mutual fund pays out a dividend, where does it go?
— E.P., Spokane, Washington
AThe stock dividend goes first to the mutual fund, which holds onto it temporarily. The fund then typically pays the total dividends received per share in a distribution to shareholders, generally quarterly or annually.
You’ll often be asked, when you first invest in a mutual fund, whether you want to receive dividend payments in cash or to have them reinvested in additional shares — or fractions of shares — of the fund. Reinvesting dividends is a great way to grow value faster.
Q
Can I claim a loss on some worthless shares of stock without selling them?
— I.S., Dalton, Georgia
AYes, but the shares can’t just have fallen by 90% or more — they must truly be worthless in the eyes of the IRS, and you should be prepared to prove their worthlessness.
For tax purposes, you’ll treat the worthless stock as an asset you sold on the last day of the year for $0, and you’ll claim the loss on Form 8949. The form has two sections, for short-term losses (from assets held a year or less) and long-term losses (from assets held more than a year). You’ll need to classify your loss accordingly.
If your shares are nearly worthless, your brokerage may help you out by buying them from you for a pittance, just to close out your position. That way, you’ll have a realized loss that you can claim on your tax return.
You can learn more about reporting losses (and gains) on your tax return at IRS.gov. Remember that you can offset capital gains with your capital losses, thereby shrinking your tax bill.