What Is an Exempt-Interest Dividend?

An exempt-interest dividend is a distribution to investors from a mutual🏅 fund that is not subject to federal income tax. Exempt int♕erest dividends most often are paid by mutual funds that invest in municipal bonds.

While exempt-interest dividends are not subject to federal income tax, they may be subject to state income tax or the alternative minimum tax (AMT).

Taxpayers must report exempt-interest dividends on their federal returns. This is recorded on line 2a of your Form 1040. The amount of exempt-interest dividends you received during the year will appear in box 12 of the Form 1099-DIV you received from the fund provider.

Understanding an Exempt-Interest Dividend

A dividend is a distribution of a portion of a company's profits to its 澳洲幸运5开奖号码历史查询:shareholders. In most cases, it is not an inc🎐urred mandatory cost and is ꦰnot classified as an expense. Dividends are authorized and deducted only after net earnings are determined.

Dividends are commonly paid to owners oꦑf common stock shares. Shareholders receive dividend payments periodic🍬ally throughout the year, commonly every quarter.

For example, Apple's dividend as of Feb. 2, 2023, was $0.23 per share. Apple makes four dividend payments a year, all of which are taxable.

An exempt-interest dividend is a payment from a 澳洲幸运5开奖号码历史查询:mutual fund that is not subject to federal income tax. These dividends are mainly found in municipal bonds and i🍎n the mutual funds that invest in those bonds.

Who Buys Tax-Exempt Bonds?

People with high net worths are more likely to invest in municipal bonds because the tax savings outweigh the relatively low returns provided by t🌳he investments. High-net-worth individuals ℱare subject to higher taxes, so low-tax investments are a popular choice.

The types of municipal bonds that are exempt from tax𒉰es are those that are raising money for uses that benefit the community.

The tax benefits of exempt-interest dividends are irrelevant if the bonds are held in an 澳洲幸运5开奖号码历史查询:individual retirement account (IRA). This is because all dividends a♈nd interest held within ཧan IRA are tax-exempt.

State Income Tax

Although dividend interest is federally exempt, it may or may not be exempt from state taxes depending on the state where the municipal bonds were issued and thღe state in which you file your taxes.

Depending on the state, all of you𒆙r dividend interest may be exempt, or only the portion of it that comes from bonds that are iꦅssued in the state where you are filing your taxes.

For example, assume you have a tඣotal dividend interest of $100, $60 of which comes from the state you reside in and $40 from another state. The state you reside in only allows exemptions from its taxes on bonds within the state, so you do not have to pay state tax on the $60, but you will have to on the $40.

Alternative Minimum Tax (AMT)

The alternative minimum tax (AMT) places a floor on the percent⛄age of taxes that an individual must pay, regardless of how many deductions or exemptions they may claim on their returns.

• For the 2024 tax year, the exemption is $85,700 for single filers and $133,300 for married couples filing jointly.

For the 2024 tax year, the exemption is

The goal of the AMT is to ensure that individuals pay a certain level of taxes rather than escaping their obligation through various 澳洲幸运5开奖号码历史查询:tax breaks. Therefor💙e, exempt-interest dividends can be subject to the AMT to ensure that some individuaಌls are not avoiding paying their fair share.

IRS 澳洲幸运5开奖号码历史查询:Form 6251 will help individuals determine if they owe an alternative minimum tax (AMT), or a tax software will automatically calculate it for them.

The Bottom Line

Municipal bonds and mutual funds that invest in munic🌼ipal bonds are popular choices for high-income people who want to keep some of their dividend💟 income out of the hands of the IRS.

It works. But remember: that tax exemption is only tax-free at the federal level. You may or may not owe taxes at the state or local level. Moreover, exempt-interest dividends won't help you sidestep the federal 澳洲幸运5开奖号码历史查询:alternative minimum tax.

In any case, you need to report even tax-exempt dividends on your 🏅federal return. T﷽he numbers will be recorded on the 1099-INT you receive after the end of the year.