7939 / What are exempt interest dividends? How are exempt interest dividends received from a mutual fund taxed?

Exempt interest dividends. Some mutual funds invest in securities that pay interest exempt from federal income tax. This interest may be passed through to the fund’s shareholders, retaining its tax-exempt status, provided at least 50 percent of the fund’s assets consist of such tax-exempt securities. Thus, a shareholder does not include exempt-interest dividends in income. The mutual fund will send written notice to its shareholders advising them of the amount of any exempt-interest dividends.¹ Any person required to file a tax return must report the amount of tax-exempt interest received or accrued during the taxable year on that return.² Under JGTRRA 2003, exempt-interest dividends do not count as qualified dividend income (see Q 702) for purposes of the 20/15/0 percent tax rates.³