Question regarding 1099 Mutual Fund Tax emept

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Question regarding 1099 Mutual Fund Tax emept

Postby FB01 » Fri Jan 25, 2013 3:59 pm

Hi,

This year I put money in below Tax Exemp mutual fund in Taxable account and reinvest the divident

VMLTX - Vanguard Limited Term Tax Exempt
VWITX - Vanguard Intermediate Term Tax Exempt

However, I have not sold any of them but I received 1099-DIV (dividend and distribution) for Mutual fund where it says "Exempt Dividend Interest" - 100 dollars (Box 10)

Do I need to enter this while doing the tax though I have not sold any of the above mutual funds?

Thanks
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Re: Question regarding 1099 Mutual Fund Tax emept

Postby dbr » Fri Jan 25, 2013 4:01 pm

Yes, it goes on line 8b of the 1040. You will not be assessed federal tax on this amount. If you file a state income tax return you may be taxed on part or all of that.
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Re: Question regarding 1099 Mutual Fund Tax emept

Postby NYBoglehead » Fri Jan 25, 2013 4:18 pm

While muni bond interest is tax-exempt, for retirees there are conditions in which municipal bond interest affects the taxation of social security benefits. My guess is that is why the line appears on the tax filing form.
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Re: Question regarding 1099 Mutual Fund Tax emept

Postby sscritic » Fri Jan 25, 2013 5:23 pm

NYBoglehead wrote:While muni bond interest is tax-exempt, for retirees there are conditions in which municipal bond interest affects the taxation of social security benefits. My guess is that is why the line appears on the tax filing form.

and IRMAA and perhaps other items. Tax exempt interest has been on form 1040 for a while, for example:

In 2001
http://www.irs.gov/pub/irs-prior/i1040--2001.pdf

and earlier, 1991:
If you received any tax-exempt interest (such as from municipal bonds), report it on line 8b. Include any exempt-interest dividends from a mutual fund or other regulated investment company.
http://www.irs.gov/pub/irs-prior/i1040--1991.pdf

Quiz question: what was the first year you had to report tax-exempt interest on your 1040?

I will give you some help: it wasn't there in 1981. There was a line 8b, but it was for dividends.

More help: take either of my links to the instructions and replace the i1040 with f1040 to see the form for a given year.
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Re: Question regarding 1099 Mutual Fund Tax emept

Postby dratkinson » Fri Jan 25, 2013 6:04 pm

dbr wrote:Yes, it goes on line 8b of the 1040. You will not be assessed federal tax on this amount. If you file a state income tax return you may be taxed on part or all of that.


+1



Federal tax return.

Last year I noticed TaxACT listed TE interest in two places: (1) on form 1040 (above), and (2) on Sch B as both an addition to interest income (for completeness) and then as a subtraction from total interest. All I needed to do was answer the tax software 1099 questions and it completed the federal forms/return.



State tax return.

For my state tax return, the process is a little more involved, if I don't want to over pay state income taxes. Read your state tax instructions closely for allowable TE-income deductions.

For my CO state return, the tax software **added the TE interest (from 1040) to my adjusted gross income (from 1040) to compute my state taxable income. This is guaranteed to be the highest state taxable income. But I can lower this amount if I compute the below deductions.


Deductions from state income taxes for TE income. My state allows the deduction from TE income (which is taxable for state purposes) that portion which is earned in the state. (Other states are less generous.) This information can be *computed from the tax information Vanguard send us. The computation is required as the tax software does not know about Vanguard's TE-bond state-investing percentages.

    *The computation is simple enough. Vanguard's 1099(s) lists the amount(s) you earned from each TE bond fund, and the Vanguard tax information lists the state percentages. So if I earned $100 in TE interest from VMLTX (OP's example) and 1% came from CO, then I am allowed to deduct $1 on my state tax return.

    Compute the (state) deductible amounts for each TE-bond fund.

    Compute total deductible amount.

The tax software asked some question like, "How much tax-exempt interest to exclude from your state tax return?" Once I answered that, then the tax software has enough information to complete the TE-interest add-back portion of my state tax return/forms. **It was listed as a reduction in the TE-income add-back amount used to compute my state taxable income.

    Instead of $100 in TE-interest add back on my state tax return, it became $99 in TE-interest add back.



Deductions from state income taxes for US Government interest. Notice some of your TE bond income may have come from US territories and possessions. *Compute this amount and it should be listed as a state income tax subtraction for US Government Interest earned.

    *If 1% of VMLTX's $100 TE interest came from US territories and possessions, then I can subtract $1 as US Government Interest income.



Bottom line. For OP's VMLTX example, I reduced my state taxable income by $2 by computing above deductions. And at my state's 5% flat tax rate, that reduces my state income taxes owed by 10 cents... which is rounded to $zero for this example. YMMV. :)

That's all I remember from last year.



Edit. For completeness.
d.r.a, not dr.a.
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Re: Question regarding 1099 Mutual Fund Tax emept

Postby RockOn » Sat Jan 26, 2013 9:14 pm

I'm having trouble finding this information for the the state by state breakdown of VMLTX dividends, or more specificially, Massachusetts. Anybody know?
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Re: Question regarding 1099 Mutual Fund Tax emept

Postby RockOn » Sat Jan 26, 2013 9:23 pm

Whoops- looks like an excellent Boglehead already answered the question in a previous post. Looks like I need to brush up on my search function skills.
Here's the link, if anybody needs the breakdown.

http://www.vanguard.com/pdf/inbst_2012.pdf
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Re: Question regarding 1099 Mutual Fund Tax emept

Postby dratkinson » Sun Jan 27, 2013 1:25 am

The same information (state and US territorial/possessions percentages) is mailed to us in Vanguard's 1099 DIV envelope as a 1-page supplement (same title as above PDF): "Tax-exempt interest dividends by state for Vanguard Municipal Bond Funds and Vanguard Tax-Managed Balanced Fund".
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Re: Question regarding 1099 Mutual Fund Tax emept

Postby scrabbler1 » Sun Jan 27, 2013 10:46 pm

DBR and NYBoglehead are correct. May I add one more thing which can make what is otherwise tax-exempt interest partly taxable? (This applied to me in 2008.) In that statement of tax-exempt interest, there is also an entry for a taxable portion under the AMT. So in that case you will have to add back some of that otherwise tax-exempt interest in the AMT calculation.
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