7935 / What is an exempt-interest dividend? How is a RIC shareholder taxed upon distribution of an exempt-interest dividend?
An exempt-interest dividend is any dividend that is not a capital gain dividend that is designated by the RIC as an exempt-interest dividend in statements furnished to the RIC shareholders. However, if the exempt-interest dividends reported by the RIC for the taxable year exceed the exempt interest of the RIC for that year, the exempt-interest dividend is the excess of (1) the reported exempt-interest dividend amount over (2) the excess reported amount that is allocable to the reported exempt-interest dividend amount.2 Generally, the exempt-interest dividend will equal the RIC’s tax-exempt interest income minus the expenses that are allocable to that income.3
A RIC shareholder is able to exclude the amount of an exempt-interest dividend from income—the exempt-interest dividend is treated as though it were an item of interest that is excludable from gross income in the same manner as interest on state or local bonds.4
1. IRC § 852(b)(5).
2. IRC § 852(b)(5)(A).