Tax Center FAQ
Please keep in mind that the information provided in the Tax Center is neither tax nor legal advice. You should speak to your tax professional for specific information regarding your tax situation.
Frequently Asked Questions
A mutual fund dividend distribution is income from dividends and interest, less operating expenses, earned by a mutual fund’s holdings. Income in excess of a fund’s expenses must be paid as a dividend to shareholders at least once per year.
If a fund has no income in excess of fund expenses, it is not required to make a dividend distribution.
Capital gains and losses may be generated when portfolio managers sell securities held by a mutual fund. Any realized gains in excess of realized losses for the year are passed on to shareholders in the form of capital gain distributions and are reported on Form 1099-DIV (even if they are reinvested). A gain on the sale of an investment owned by a fund for one year or less is considered short-term for federal income tax purposes and is taxed as ordinary income when distributed. A gain on the sale of an investment owned by a fund for more than one year is considered long term for federal income tax purposes and taxed at long-term capital gains tax rates when distributed. Any realized losses in excess of realized gains for the year may be carried forward by a fund to offset excess realized gains in future years.
If a fund does not have excess realized gains for a given year (inclusive of any losses carried forward from prior years), it is not required to make a capital gain distribution.
Anticipated distribution dates for 2024 can be found in the distribution calendar. Distribution dates are subject to change.
Tax law requires that mutual funds pay substantially all net investment income and net capital gains to their investors, who may elect to either receive cash or reinvest in additional shares of the fund. Net investment income distributions are made in accordance with a mutual fund’s distribution policy (typically quarterly or annually). Capital gain distributions are made annually in December. Additionally, certain funds may be subject to an additional distribution, referred to as a spillback distribution.
Spillback distributions are distributions of ordinary income and/or capital gains from the previous fiscal year that were not distributed by the end of that year. Spillback distributions must be declared within 9½ months (a fund’s extended tax return due date) of the end of the fund’s fiscal year. The extended tax return due dates are July 15th and October 15th for the September 30th and December 31st fiscal year end funds, respectively. Even though they represent ordinary income and/or capital gains earned by the fund in the previous fiscal year, they are taxable in the year in which they are paid.
As spillback distributions represent distributions of income and/or capital gains from the previous fiscal year, a fund’s distributions for a given year do not necessarily correlate to its current performance.
Spillback distributions are common practice for mutual funds under designated rules and regulations within the Internal Revenue Code.
A mutual fund’s NAV per share is reduced by the amount of any distribution, irrespective of whether the distribution is paid in cash or reinvested in the fund by a shareholder. Shareholders who reinvest their distributions receive additional mutual fund shares equal to the amount of the distribution, net of applicable taxes.
Please note that distributions do not impact the pre-tax total return experienced by a shareholder, regardless of whether the distribution is paid in cash or reinvested, as they are contemplated when calculating a fund’s performance.
Information about a fund’s realized and unrealized capital gains, including available capital loss carryforwards, can be found in the funds’ semi-annual and annual reports to shareholders. Realized and unrealized capital gains reported in the funds’ financial statements do not include tax adjustments.
Ordinary income distribution estimates for Baron Real Estate Income Fund will be posted to the tax center section of the website early in the month for each quarterly distribution.
Annual capital gain and ordinary income distribution estimates for all funds expected to pay in December will be posted mid-October, with an updated estimate to be posted mid-November.
Spillback distribution estimates for the series of Baron Investment Funds Trust and Baron Select Funds are posted in early July and early September, respectively.
Shareholders are responsible for paying taxes on distributions they receive each year, whether they receive the distributions in cash or reinvest them in additional shares of the fund. The funds report distributions to taxable shareholders on IRS Form 1099-DIV at the end of each calendar year.
Certain types of fund accounts, such as Individual Retirement and 401(k) accounts, are tax advantaged. Shareholders who own these types of accounts pay taxes, if any, on fund distributions only when money is withdrawn from the account and will receive different IRS reports. Please consult with your tax advisor.
Ordinary income distributions are taxable to shareholders at the individual income tax rates. All or a portion of a mutual fund’s ordinary income may be distributed to shareholders as “qualified dividend income,” which is taxed at a more favorable rate than a shareholder’s individual tax rate. A fund’s net short-term capital gains are also currently taxed at a shareholder’s ordinary income tax rate. Long-term capital gains are currently taxed at a maximum rate of 20%, regardless of how long a shareholder has held their shares in a fund.
Occasionally, a fund may distribute a non-dividend distribution, referred to as return of capital. Return of capital is a non-taxable distribution from a fund which reduces the tax basis of a shareholder’s shares in a fund. This generally occurs when a fund’s distributions during a fiscal year exceed the earnings and profits of the fund, as determined under federal tax rules and regulations.
Shareholders who receive distributions from a mutual fund held in a taxable account will receive Form 1099-DIV, which will reflect all distributions paid during the calendar year, generally by mid-February following the calendar year end. Retirement accounts and corporate shareholders will not receive a Form 1099-DIV.
The IRS Form 1099-DIV is typically mailed to shareholders by the end of January for the prior calendar year, except for Baron Real Estate Fund and Baron Real Estate Income Fund (collectively the “Real Estate Funds”) which may be mailed separately to shareholders by the end of February (extension subject to approval by the IRS).
A sizable portion of dividends paid by U.S. REITs may represent a return of capital. Consequently, a portion of the distributions from the Real Estate Funds may also represent a return of capital. Return of capital distributions are not taxable to shareholders, but they must be deducted from the adjusted tax basis of the Real Estate Funds. Returns of capital are listed as “nontaxable distributions” on Form 1099-DIV. As U.S. REITs typically will not indicate what proportion of their distributions represent return of capital in time to allow the Real Estate Funds to meet the January 1099-DIV reporting deadline, shareholders may receive a separate 1099-DIV for the Real Estate Funds in February.
Yes. The tax character of a mutual fund’s distributions is determined annually in accordance with federal tax rules and regulations, and certain information to finalize such determinations may not be available at the time of a mutual fund’s distribution. Shareholders should rely on the information reported to them on Form 1099-DIV for purposes of completing their income tax returns.
Record Date: Shareholders who purchase fund shares before or on the record date (shareholders of record) are eligible to receive the distribution.
Ex-Date: The Fund’s NAV will be reduced by the amount of the distribution on this day. Shareholders who purchase fund shares on the ex-date are not eligible to receive the distribution.
Payable Date: Distributions will be paid to shareholders of record on this day. Shareholders who elected reinvestment will receive the NAV per share on the ex-date and credited with shares on the payable date.