When mutual funds distribute their income to shareholders, the distributions may fall into one of several categories and each is governed by a different set of tax rules.
Mutual funds may earn income from their holdings in a variety of forms, including interest and dividends. This income, minus a fund’s annual expenses, is distributed to shareholders. Ordinary income tax rates may apply to that portion of the dividend that comes from interest, nonqualified dividends, net short-term capital gains, and other types of income. Short-term gains treated as ordinary income are those realized from the sale of securities within a fund that the fund has held for one year or less. (Generally, capital gains or losses occur when the difference between the price paid for a security and the price for which it is sold result in a gain.)
The table below shows the federal tax rates on ordinary income for the 2007 tax year. Each tax rate corresponds to a tier of your taxable ordinary income, with the lowest portion taxed at 10%, the next tier taxed at 15%, and so on. Your filing status — single taxpayer, head of household, or married couple filing jointly or separately — determines the dollar levels that correspond to the different tax rates.
| Taxable | Single | Married
Filing Jointly or Qualifying Widow(er) |
Head of Household | Married Filing Separately |
| 10% | 0 - $7,825 | 0 - $15,650 | 0 - $11,200 | 0 - $7,825 |
| 15% | $7,825 - $31,850 | $15,650 - $63,700 | $11,200 - $42,650 | $7,825 - $31,850 |
| 25% | $31,850 - $77,100 | $63,700 - $128,500 | $42,650 - $110,100 | $31,850 - $64,250 |
| 28% | $77,100 - $160,850 | $128,500 - $195,850 | $110,100 - $178,350 | $64,250 - $97,925 |
| 33% | $160,850 - $349,700 | $195,850 - $349,700 | $178,350 - $349,700 | $97,925 - $174,850 |
| 35% | more than $349,700 | more than $349,700 | more than $349,700 | more than $174,850 |