You include the "Total capital gains distributions" in your taxable income.
When you invest in a mutual fund you understand that the mutual fund holds a bunch of securities inside it. From time to time the managers of the mutual decide to sell some security, in whole or in part, (and hopefully at a profit), because they see what they think are better opportunities in some other security.
Mutual funds, by law, must distribute substantially all of their income to their shareholders every year. If the mutual fund has net capital gains then those capital gains get distributed too, just like dividends or interest do. The capital gains distributions get reported on the 1099-DIV and you report them on your income tax return, even though you didn't initiate the sales in the mutual fund or have any say in the matter. That's just the way it works. Mutual funds are "pass through" entities and don't pay income taxes. Substantially all their income is "passed through" to shareholders so they can report it on their own income tax returns.
If you don't want to be surprised by capital gains distributed to you then instead of investing in mutual funds look to ETF's. Because of the way ETF's are organized and the way they function - even though they are buying and selling securities too - they typically don't have capital gains that need to be distributed to shareholders.
