5.1.2.2.1 Mutual Fund Distributions
Mutual fund companies do not pay taxes as long as they pass on their income and capital gains to the shareholders of the fund. The shareholders have to pay taxes on the income earned from any dividends paid from securities and any interest earned on bonds within the fund. They also have to pay taxes on any capital gains distributions incurred when the fund sold stocks or bonds at a profit.
• Interest on bonds is taxed at the investor’s ordinary income rate.
• Dividends are taxed at either the qualified rate or the investor’s ordinary income rate, depending on the dividend.