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Exempt-Interest Dividends
A mutual fund may pay exempt-interest dividends to its shareholders if it meets certain requirements. These dividends are paid from tax-exempt interest earned by the fund. Since the exempt-interest dividends keep their tax-exempt character, do not include them in income. However, you may need to report them on your return. The mutual fund should send you a Form 1099-INT showing your exempt-interest dividends. Exempt-interest dividends should be shown in box 8 of Form 1099-INT.
Information reporting requirement - Although exempt-interest dividends are not taxable, you must report them on your tax return if you are required to file. This is an information reporting requirement and does not convert tax-exempt interest to taxable interest. Also, this income is generally a “tax preference item” and may be subject to the alternative minimum tax. Box 9 of Form 1099-INT should show the tax-exempt interest subject to the alternative minimum tax. If you receive exempt-interest dividends, you should get Form 6251, Alternative Minimum Tax—Individuals, for more information.
Nondividend Distributions
A nondividend distribution is a distribution that is not out of earnings and profits and is a return of your investment, or capital, in the mutual fund and is shown in box 3 of Form 1099-DIV. A nondividend distribution reduces your basis in the shares. However, your basis cannot be reduced below zero. If your basis is zero, you must report the nondividend distribution on your tax return as a capital gain. Report this capital gain on Schedule D (Form 1040). Whether it is a long-term or short-term capital gain depends on how long you held the shares.
Reinvestment of Distributions
Most mutual funds permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. You must report the reinvested amounts the same way as you would report them if you received them in cash. This means that reinvested ordinary dividends and capital gain distributions generally must be reported as income. Reinvested exempt-interest dividends generally are not reported as income.Back to: mutual fund distribution index
Other sections concerning mutual fund distributions: Dividend Distributions, Capital Gain Distributions, Miscellaneous Distributions
