what is an exempt interest dividend 
an exempt interest dividend is a distribution from a mutual fund that is not subject to federal income tax exempt interest dividends most often are derived from 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 1understanding an exempt interest dividenda dividend is a distribution of a company s profits to shareholders it is not an incurred mandatory cost set by the receivers such as in the case of debt obligations it is not classified as an expense and is deducted last after net earnings are determined and decisions are made to make distributions out of them dividends are commonly paid to shareholders of corporate stocks shareholders receive dividend payments periodically throughout the year commonly every quarter for example apple s dividend as of february 2 2023 was 0 23 per share apple makes four dividend payments a year all of which are taxable and paid by the shareholders 4an exempt interest dividend is a payment from a mutual fund that is not subject to federal income tax and is mainly found in mutual funds that contain some municipal bond investments people with high net worths are more likely to invest in municipal bonds because the tax savings outweigh the lower returns provided by the investments high net worth individuals are subject to higher taxes so a low tax investment is a popular choice the types of municipal bonds that are exempt from taxes are those that are raising money for uses that benefit the community the tax benefits provided by the investments including exempt interest dividends are lost if the investments are held in an individual retirement account ira this is because all dividends and interest within an ira are tax exempt state income taxthe dividend interest that is federally exempt may or may not be exempt from state taxes depending on the state where the municipal bonds were issued and the state in which you file your taxes depending on the state they may allow the entire portion of your dividend interest to be exempt or only the portion of the bonds that are issued in the state you are filing your taxes while bonds from other states will be taxed for example assume you have a total dividend interest of 100 60 of which comes from the state you reside in and 40 from another state the state you reside in only allows exemptions from its taxes on bonds within the state so you do not have to pay state tax on the 60 but you will have to on the 40 alternative minimum tax amt the alternative minimum tax amt places a floor on the percentage of taxes that an individual must pay regardless of how many deductions or exemptions they may claim on their returns the goal of the amt is to ensure that individuals pay a certain level of taxes rather than escaping their obligation through various tax breaks 2 therefore exempt interest dividends can be subject to the amt to ensure that some individuals are not avoiding paying their fair share irs form 6251 will help individuals determine if they owe an alternative minimum tax amt or a tax software will automatically calculate it for them 7