In the Dividends and Distributions section of your Form 1099, you may have a value in Box 10: “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 “More than one state” and do not select the option for “I earned tax-exempt interest in more than one state” unless they feel that providing a state-level breakdown of dividends would be advantageous enough to be worth the effort. The federal tax exemption for these dividends will apply whether you choose “More than one state” 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 “More than one state” 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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