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.

  1. Dividend

    A distribution of a portion of a company's earnings, decided ...
  2. Form 1099-INT

    The form issued by all payers of interest income to investors ...
  3. Income Tax

    A tax that governments impose on financial income generated by ...
  4. Alternative Minimum Tax - AMT

    A tax calculation that adds certain tax preference items back ...
  5. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  6. Dividend Tax Credit

    The amount a Canadian resident applies against their tax owing ...
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