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How do I address “exempt-interest dividends” in my tax return or tax software?

In the Dividends and Distributions section of your Form 1099, you may have a value in Box 11: “Exempt-interest dividends.” This value represents dividends received from ETFs like MUB, which hold a broad range of U.S. municipal bonds that pay federal tax-exempt dividends.

Because the underlying bonds that result in these dividends represent a wide range of U.S. states and municipalities, most clients select the option for “Multiple States” and do not select the option for “I earned exempt-interest dividends in more than one state:

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The federal tax exemption for these dividends will apply whether you choose “Multiple States” or provide a state-level breakdown, so it’s really just a matter of the state-level exemption, which is likely very small in proportion. 

Note that state tax rules for exempt-interest dividends vary substantially by state. Some states do not tax exempt-interest dividends earned outside the state or have no personal income tax, in which case choosing “Multiple States” makes no difference. Other states like California allow you to exclude dividends paid by that state but tax dividends paid by other states. Please contact your tax advisor for questions specific to your tax situation.

 

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