I received a Form 1099-G, for my state tax refund. Do I have to include this amount as income on my return?

If you did not itemize your deductions on your Federal tax return for the same year that the state or local tax refund applies to, do not report any of the refund as income.

If you received a refund of state or local income taxes this year that you took an itemized deduction for in an earlier year, you may have to include all or part of the refund as income on your tax return. Report your taxable State or Local Refunds on Form 1040 (PDF). You cannot use Form 1040A (PDF) or Form 1040EZ (PDF). Refer to Tax Topic 405, Refund of State and Local Taxes, and Publication 525, Taxable and Nontaxable Income, for further information.

References:

• Form 1040 Instructions

I purchased stock from my employer under an employee stock purchase plan. Now I have received a Form 1099-B from selling it. How do I report this?

If the special holding period requirements described below are met, the sale of stock is treated generally as capital gain or loss. However, you may have compensation income if:

1. The option price of the stock was below the stock's fair market value at the time the option was granted, or
2. You did not meet either or both of the holding period requirement.

The holding period requirements are that you must hold the stock for more than 2 years from the time the option is granted to you and for more than 1 year from when the stock was transferred to you. If you do not meet either or both of these holding period requirements there is a disqualifying disposition of the stock. The compensation income that you should report in the year of the disqualifying disposition is the excess of the fair market value of the stock on the date the stock was transferred to you over the amount paid for the shares. .

If the holding period requirements are met, but the option exercise price is below the fair market value of the stock at the time the option was granted, you report the discount as compensation income (wages) when you sell the stock. Generally, this compensation income is the lesser of the excess of the fair market value of the stock on the date of the disposition over the exercise price OR the excess of the fair market value of the stock at the time the option was granted over the exercise price.

If the holding period requirements are met and your gain is more than the amount you report as compensation income, the remainder is a capital gain reported on Form 1040, Schedule D (PDF). If you sell the stock for less than the amount you paid for it, your loss is a capital loss, and you do not have ordinary income.

For more information, refer to Publication 525, Taxable and Nontaxable Income, and Publication 551, Basis of Assets.

Should I advise the IRS why amounts reported on Form 1099-B do not agree with my Schedule D for proceeds from short sales of stock not closed by the end of year?

If you are able to defer the reporting of gain or loss until the year the short sale closes, there are certain notations you can make on you Form 1040, Schedule D (PDF), Capital Gains and Losses that will allow you to reconcile your Form 1099-B (PDF) to your Form 1040, Schedule D (PDF) and still not recognize the gain or loss from the short sale. Include your name as it appears on the return and your social security number.

For more on these rules and the rules for put options and wash sales refer to Chapter 4 of Publication 550, Investment Income and Expenses.

References:

• Tax Topic 409, Capital Gains and Losses

I received a 1099-DIV showing a capital gain. Why do I have to report capital gains from my mutual funds if I never sold any shares?

A mutual fund is a regulated investment company that pools funds of investors allowing them to take advantage of a diversity of investments and professional asset management. You own shares in the fund, but the fund owns assets such as shares of stock, corporate bonds, government obligations, etc. One of the ways the fund makes money for its investors is to sell these assets at a gain. If the asset was held by the mutual fund for more than one year, the nature of the income is capital gain, which gets passed on to you. These are called capital gain distributions, which are distinguished on Form 1099-DIV (PDF), from income that is from other profits, called ordinary dividends.

Capital gains distribution are taxed as long term capital gains regardless of how long you have owned the shares in the mutual fund. If your capital gains distribution is automatically reinvested, the reinvested amount is the basis of the additional shares purchased.

References:

• Publication 564, Mutual Fund Distributions