Question

What is the federal tax treatment of exempt-interest dividends reported on Form 1099-DIV, Dividends and Distributions?

Exempt-interest dividends are:
Not taxable at the federal level and are not reported on the federal tax return.
Not taxable at the federal level. However, taxpayers are still required to report the income on their tax return.
Taxable as long-term capital gains on the federal return.
Taxable as ordinary income on the federal return.

Answer 1

Correct answer:
Not taxable at the federal level. However, taxpayers are still required to report the income on their tax return.

Explanation: Exempt‑interest dividends (reported in box 11 of Form 1099‑DIV) generally are federally tax‑exempt because they come from municipal bond interest. You still report them on your return (and on Schedule B if required) because they affect other tax items (for example, they may be relevant for the alternative minimum tax and for certain income phase‑outs) and might be taxable at the state or local level.