Exempt Dividends?

[zeros]

I'm starting to getting in brokerage statements. When it says "exempt dividends," can we assume that these would be exempt on both the federal and state?

[Burke]

No, you cannot. You must review the detail to determine the state in which the div/interest instrument is located. It is usually exempt in the resident state, and taxable if it comes from an investment in another state.

[FEDUKE404]

The rules

I'm starting to getting in brokerage statements. When it says "exempt dividends," can we assume that these would be exempt on both the federal and state?

ABSOLUTELY not!!!!

States cannot tax their "own" dividends, nor can they tax federal obligations (normally includes Puerto Rico, Guam, and Virgin Islands also), but they certainly can tax "exempt dividends" from other states/municipalities. There is usually an "addition to income" line somewhere on the state income tax return to handle the relevant amount.

Most brokers should include a worksheet for a fund showing the per cent origins, by location, for each state. Such information is readily available online also.

Also, don't forget, you must "report" the tax exempt dividends on the federal return (line 8b of Form 1040). Although the income is not taxable, it can become a factor for the accurate determination of the amount of Social Security benefits that are ultimately taxable.

FE

[Gary2]

States cannot tax their "own" dividends

I agree with everything except this. States certainly can tax interest on their own bonds, including those reported as dividends. They just choose not to.

I have a vague recollection of some state that had been taxing their own bonds and had to change their law. But this time of year, it's hard to keep track of what's research and what's nightmares.

[FEDUKE404]

States choose to exempt muni bonds?

I agree with everything except this. States certainly can tax interest on their own bonds, including those reported as dividends. They just choose not to.

I have a vague recollection of some state that had been taxing their own bonds and had to change their law. But this time of year, it's hard to keep track of what's research and what's nightmares.

Not high on my list of priorities, especially when I make a general statement (trying to be helpful), but it has always been my understanding that the federal government cannot tax state obligations and states cannot tax direct federal obligations or their own state obligations.

With all of the crazy new investment vehicles out there (HINT: Why are there AMT preference items on many "tax-free" bonds?) anything is possible.

There is also the subtle difference between someone owning a tax-exempt bond versus someone owning a commercially run tax-exempt bond fund. Maybe that is where the hair-splitting occurred?

My original comment was far from an etched-in-stone legal commentary. I was not considering anything related to "choice" by the states.

But I do think it is pretty close to the truth.

So, for my own information, what states DO tax their own municipal bonds? ? ?

FE

[ChEAr$]

Gary2 beat me to the punch. Most states choose not to.

[Traveling EA]

Tax exempt bonds

In WI there are many muni bonds issued for various purposes. Very few of them are double exempt in WI. It depends what the original bond issue says.

[Gary2]

In WI there are many muni bonds issued for various purposes. Very few of them are double exempt in WI. It depends what the original bond issue says.

Thanks for finding/contributing that.

I wasn't able to find the example I came across recently, but I did discover an oddity: New Hampshire (which only taxes interest and dividends) used to exclude interest from Vermont banks. I have no idea why there's no comparable exclusion for NH banks, though perhaps it's just in the way obsolete statutes are presented at their web site.