Exempt-Interest Dividend

DEFINITION of 'Exempt-Interest Dividend'

A distribution from a mutual fund that is not subject to income tax. Exempt-interest dividends are often associated with mutual funds that invest in municipal bonds. While exempt-interest dividends are not subject to federal income tax, they may still be subject to state income tax or the Alternative Minimum Tax (AMT). The dividend income must be reported on the income tax return, and it is reported by mutual funds on Form 1099-INT.

BREAKING DOWN 'Exempt-Interest Dividend'

Individuals with high net worths are more likely to use municipal bonds and funds because the tax savings outweigh the lower returns provided by the investments. The tax benefits provided by the investments, including exempt-interest dividends, are lost if the investments are held in an IRA. This is because all dividends and interest within an IRA are considered tax-exempt.

RELATED TERMS
  1. IRS Publication 564: Mutual Fund ...

    A document published by the Internal Revenue Service (IRS) that ...
  2. Net Investment Income

    Income received from investment assets (before taxes) such as ...
  3. IRS Publication 514

    A document published by the Internal Revenue Service that provides ...
  4. Qualified Dividend

    A type of dividend to which capital gains tax rates are applied. ...
  5. Mutual Fund Yield

    Dividend payments divided by the value of a mutual fund’s shares. ...
  6. Double Exempt

    The status accorded to municipal bonds for which interest is ...
Related Articles
  1. ETFs & Mutual Funds

    How Tax-Efficient Is Your Mutual Fund?

    Learn about factors that influence the tax-efficiency of your mutual fund, how income from your investment is taxed and what to look for when choosing a fund.
  2. ETFs & Mutual Funds

    The Basics of Income Tax on Mutual Funds

    Learn about the basics of income tax on mutual funds, including what types of income may be subject to the capital gains tax rate.
  3. Retirement

    Understanding How Dividends Are Taxed

    Learn how dividends are taxed by the IRS, and understand the different types of dividend income as well as the capital gains tax rates.
  4. Financial Advisor

    How to Plan for Taxes on Dividends

    Dividends are taxed differently than other investment income. Here are some strategies to help lower taxes on dividends.
  5. Managing Wealth

    Investment Tax Basics For All Investors

    Nothing can be said to be certain, except death and taxes even in your investments.
  6. Investing

    Introduction To Dividends: Doing Your Homework And Taxes

    Similar to any other investments, it is important to perform due diligence prior to making any dividend-related decisions. There are several factors to consider when researching and selecting ...
  7. Financial Advisor

    Understanding How Mutual Funds Pay Dividends

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  8. Personal Finance

    What You Need To Know About Capital Gains And Taxes

    Find out how your profits are taxed and what to consider when making investment decisions.
  9. Personal Finance

    How Are Capital Gains And Dividends Taxed Differently?

    Individuals in the 25% or higher tax bracket pay a 20% tax on long-term capital gains.
  10. Personal Finance

    Comparing Long-Term vs. Short-Term Capital Gain Tax Rates

    Learn about the difference between short- and long-term capital gains and how the duration of your investment can impact your tax liability.
RELATED FAQS
  1. Is dividend income taxable?

  2. Where is the best place to invest $400,000 without paying taxes?

    I got $400,000 to take out of profit sharing. ... Read Answer >>
  3. In what situations must taxes be paid on a stock dividend?

    Understand the situations in which investors must pay taxes on stock dividends received, and the different tax rates that ... Read Answer >>
  4. Do mutual funds pay dividends or interest?

    Learn how and why mutual funds pay interest or dividends, including the different funds and which types generate each type ... Read Answer >>
  5. How are capital gains and dividends taxed differently?

    The U.S. tax code gives similar treatment to dividends and capital gains, although this will change slightly in 2013. Currently, ... Read Answer >>
  6. Do mutual fund companies pay taxes?

    Learn how mutual funds are incorporated as regulated investment companies and are exempt from paying taxes under certain ... Read Answer >>
Hot Definitions
  1. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  2. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  3. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  4. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  5. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
  6. Security

    A financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship ...
Trading Center