From Yahoo Finance: 2025-03-26 10:49:00

Exempt-interest dividends from municipal bond funds are often free from federal taxes but may be taxed at the state level based on residency and bond origin. Financial advisors can help navigate tax implications. Some states fully exempt these dividends, while others tax them based on where the bonds were issued, affecting investors differently.

Investors use funds with exempt-interest dividends for tax-efficient income, especially in higher tax brackets. While federal tax-free, these dividends must be reported on tax returns and can impact MAGI, Social Security taxation, and AMT exposure. Tax regulations vary by state, so investors should consult professionals for current treatments.

Nine states, including Alaska and Florida, fully exempt exempt-interest dividends from taxation. New Hampshire repealed taxes on interest and dividends in January 2025. States like California and New York exempt interest from in-state municipal bonds but tax out-of-state bond interest. Some states tax all such dividends, impacting mutual fund investors’ tax efficiency.

State tax policies on exempt-interest dividends vary widely, influencing investors’ tax burden and ROI. Understanding these policies and evaluating investments accordingly can help manage tax exposure. Tax-loss harvesting can offset gains with losses, reducing taxable income, and carrying forward additional losses for future years. Financial advisors can help build tax strategies around income and assets.



Read more at Yahoo Finance: How Do States Tax Exempt-Interest Dividends?