UNIT INVESTMENT TRUST General Information for Reporting
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UNIT INVESTMENT TRUST General Information for Reporting Please consult a tax advisor to determine an individual’s tax situation. This document is not meant to be a substitute for professional tax advice. Page | 1 BNY MELLON I. GENERAL INFORMATION TABLE OF CONTENTS INTRODUCTION I. General Information This is designed to assist with understanding a Unit Investment Trust (“UIT”) and Regulated Investment Company pg. 3 related tax reporting structures. Grantor pg. 4 For tax purposes, a UIT is generally organized as either a RIC or Grantor. This Timing Differences pg. 5 distinction becomes apparent during tax reporting as a Trust has different requirements based on tax structure. Reclassification pg. 6 State and Local Tax Information pg. 6 All information that follows is a general explanation of particular matters related to year-end tax reporting for Unit Investment Trusts (“UITs”). It is recommended Intangible Tax pg. 6 that any specific questions regarding an investor’s tax preparation be referred to Alternative Minimum Tax pg. 6 a qualified tax professional that is familiar with the investor’s circumstances. Although the design of tax information varies from one institution to the next, the II. Forms and Changes following are general descriptions to assist in understanding that reporting. Form 1099 DIV pg. 7 This should not be used as a substitute for professional advice. For answers to Form 1099 INT pg. 8 specific tax questions, clients should seek advice from their tax advisors or the Form 1099 B pg. 8 Internal Revenue Service at (800) 829-1040. For general trust level tax inquiries, please contact the BNY Mellon UIT Tax Information line at (866) 568-8985. Form 1099 OID pg. 9 Supplemental Reporting Information pg. 9 IRS Changes for 2016 pg. 10 III. Appendix Frequently Asked Questions pg. 12 Page | 2 BNY MELLON Regulated Investment Company RIC Spill-Over/Spill-Back Dividends A UIT structured as a Regulated Investment Company (RIC), qualified under A RIC must satisfy certain distribution requirements with respect to each taxable Subchapter M of the Internal Revenue Code (IRC), is eligible to pass through capital year in order to be eligible for pass-through tax treatment to its investors under gains, dividends or interest earned on fund investments directly to individual Subchapter M of the Internal Revenue Code. Since the exact amount of investors without paying tax on the RIC level. investment company taxable income and net capital gain generally is not known until the close of the taxable year, it may be difficult for a RIC to pay sufficient General Information about a RIC: dividends to its investors during a taxable year in an amount necessary to completely eliminate tax at the RIC level. This difficulty is magnified by the fact . For tax purposes, investors are deemed to own shares of the RIC, not the that there normally is a delay between the declaration of a dividend and the underlying securities. actual distribution of such a dividend. Under a special tax provision, a RIC can . In-kind distribution of trust assets upon the redemption of units is a elect to treat as paid, during a particular taxable year, certain dividends actually taxable event to the investor. paid by the RIC in the subsequent year. Such dividends commonly are referred to . All taxability issues are taken into account at the trust level. as “spillover dividends” or “spillback dividends.” This procedure affects only the . The Original Issue Discount (OID) accrued by a RIC is subject to distribution tax treatment of the RIC. The investors are generally taxed on dividends in the requirements. year of the actual distribution. Dividends are not required to be declared until the extended due date of the RIC’s tax return; which for a calendar year trust is . A RIC may elect to pass-through foreign tax paid to investors if, at the end September 15th of the subsequent year. Consequently, if spillover distributions of the taxable year, 50% or more of the portfolio is comprised of foreign are necessary, they are commonly declared in or prior to September. securities, or, alternatively, 50% or more of the portfolio is comprised of underlying RICs at the end of each quarter. An investor has a cost basis based on the units of the RIC. There are certain tests to qualify as a RIC, such as diversification and gross income tests. Generally, a RIC must pay out 90% of its investment company taxable income (including any net short-term capital gains) for the taxable year in order to qualify as a RIC. Tax Reporting is not subject to the Widely Held Fixed Income Trust (WHFIT) rules and reporting almost always reflects cash distributed. Page | 3 BNY MELLON Grantor Trust Grantor Trusts containing Commodities/Collectibles Units of a Grantor represent pro-rata ownership (proportionate ownership) of the Gains for a Grantor whose portfolio consists, in part, of securities of pooled funds underlying securities in the Trust. invested in commodities (i.e. Silver, Gold, Platinum, and Palladium) are taxed at a different tax rate than that a gain realized on other portfolio securities. The IRS General Information about a Grantor Trust: considers these precious metal commodities as collectibles. This categorization For tax purposes, investors are deemed to own a pro rata portion of each of becomes important when the investor calculates gain or loss upon redemption of the securities comprising the Trust portfolio. units or maturity of the trust. In-kind distribution of the pro rata share of Trust securities represented by a unit is not a taxable event. Expenses in a Grantor All taxability issues are taken into account at the investor level. The expenses of Grantors are deducted from the Trust’s income account prior to Taxes on the amount of accretion from any OID flows to the investors and is distribution of income to the unitholders. Interest and dividend amounts reported paid by the individual investor. are “grossed up” to include expenses. Proportionate ownership allows individuals the opportunity to take advantage of tax credits on their tax returns for foreign securities held in A Grantor that contains Tax-Exempt interest may have the interest “grossed up” to the trust. include expenses, but, because of the tax-exempt status of the interest, there is no need to segregate the expenses from the interest. Cost basis treats each security in the portfolio as a separate item. A Grantor is not subject to the qualification tests applicable to RICs. There are two types of expenses: a) Investment Expenses, (i.e., Trustee and Sponsor fees). These may be Reporting Gross Proceeds under the WHFIT Reporting Requirements tax-deductible to the investor if they itemize their tax returns and A Grantor trust is required to comply with the Widely Held Fixed Income Trust these expenses, along with other “miscellaneous itemized (WHFIT) regulations regarding tax reporting. deductions”, exceed 2% of the investor’s Adjusted Gross Income. b) Organizational expenses, (i.e., costs associated with establishing a new A Grantor deposited prior to July 31, 2006 and fully funded before October UIT). Generally, these expenses are incurred during the first year of 2006 will be “grandfathered,” meaning it will still continue Distribution- the trust. These are not tax-deductible, but can be used to increase based Gross Proceeds reporting. the investor’s cost basis (price paid per unit upon original purchase). Subject to certain exceptions, a Grantor deposited July 31, 2006 and after is required to report Gross Proceeds on a trust Receipt-basis. For Receipt-based trusts, transaction dates reflect when the Trust receives the Gross Proceeds rather than when it distributes the proceeds. Page | 4 BNY MELLON Timing Differences Investors may inquire why the amount of dividends and interest reported in a Tax POSITIVE Information Statement differs from the amount of income received from a Grantor Trust during the year. In addition to the “gross up” of reported income for Prior reporting Current Reporting Year Current Year expenses discussed above, due to the varied schedule of payments from the Year individual securities in the Trust's portfolio, one of the following situations could occur: Record Payable Record Payable Date Date Date Date December December January January a) POSITIVE TIMING DIFFERENCE – Income is received by the Trust in the 10th 25th 10th 25th current year but not distributed to investors until the following year. For example, the Trust receives income after the last payable date for the year; the Income will be distributed on the first payable date of the New Year. However, Income is reportable in the year it is received by the Trust, not the year it is distributed. December 19th January 25th monies received monies paid to by UIT investors B) NEGATIVE TIMING DIFFERENCE – Income is distributed to investors, but not received by the Trust in the current year. For example, the Trust pays th on December 25 , but will not receive income from the portfolio until th th January 18 of the following year. In order to meet the December 25 payment, the Trust's Income Account will have a negative balance NEGATIVE th until January 18 Prior Reporting Current Reporting Year Current Year Year Record Payable Record Payable Date Date Date Date December December January January 10th 25th 10th 25th December 25th January 18th monies paid to monies received unitholder by UIT Page | 5 BNY MELLON Reclassification Alternative Minimum Tax Distributions may be subject to reclassification. Although an investor receives The Alternative Minimum Tax (or AMT) provides an alternative set of rules for distributions from the Trust’s “Income” and “Principal” accounts during the year, calculating income tax. The Prospectus and Trustee’s Annual Report will list the these distributions may be classified differently on the unitholder’s reporting.