Dividend from Interest

Forum|Forum|5 years ago
February 3, 2021
2 replies
23 views

Alabama state tax says that you can exempt part of interest income as follows.

"The percentage of dividends derived from interest on United States obligations and/or Alabama municipal obligations which are received from a regulated investment company."

For dividend income it says this.

"All dividends, including liquidating dividends, you received in 2020 are fully taxable."

From this dividend income, it says all dividends are fully taxable but dividends derived from interest is not. I've never heard of "dividend derived from interest." What does this mean? How is that different from a regular dividend?

The form clearly only allows exemption under interest and not under dividend under column A. So I really would like to know what the difference is. I really don't understand. I never hear of dividend from interest before.

Best answer by SteamTrain

@jr72 OK, some seat-of-the-pants thinking, subject to, perhaps , someone's more knowledgeable comments/info.

_________________________________________

Yeah, sometimes certain Bond dividends are confusingly called interest too. It's not actually "dividends from interest"

1) Dividends from stock holdings are always called dividends.

2) The interest from bonds, (Company, State, Municipal, or US Govt ) are sometimes confusingly, or interchangeably called dividends too...when it's really just interest. BUT .. The "dividends derived from interest" that Alabama refers to as being exempt from AL taxation?......they may actually be referring to $$ in box 1a of a 1099-DIV form. IF you hold any mutual funds, they will note all the stock dividends + interest from US Govt bonds they held in box 1a of a 1099-DIV form...so that number in box 1a is mixed stock dividends plus US Govt Bond interest. So they are telling you that the US Govt portion of box 1a on the 1099-DIV form is eligible to not be taxed by AL...and can be broken out to not be included in AL taxable income.

3) the "Alabama municipal obligations which are received from a regulated investment company." (as noted already by @ErnieS0 above) will be on that 1099-DIV form in box 11, but will be mixed with $ from municipal bonds of all the other states that your Mutual fund may hold. Box 11 $$ on the -DIV form are commonly referred to as "exempt interest-dividends", i.e. both designations....kind of a "whichever you want to call them" term.

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then #4)

4) Credit Unions refer to their interest issued as "dividends", probably because Credit Unions are considered customer owned.....but it is all reported on a standard 1099-INT form and never on a 1099-DIV ....so it's really "interest".

___________________________

yeah. ARRRRGHHH !!

E

ErnieS0

Level 15

Certain dividends, called exempt-interest dividends, contain investments that are not subject to federal income tax. For example, as Alabama says, your mutual fund may include dividends derived from interest on United States obligations and/or Alabama municipal obligations which are received from a regulated investment company.

Exempt-interest dividends are reported in Box 11 of Form 1099-DIV. However, you will need more information from your mutual fund company to allocate amounts to Alabama.

Refer to Tell us more about your exempt-interest dividend for more information.

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J

jr72Author

Level 3

My 1099-DIV has $$ on 1a but box 11 is zero. I have the fund in the list which is confusing because that would imply that box 11 should've had something but it doesn't.

SteamTrain

Level 15

@jr72

Not necessarily. For a 1099-DIV..

1) US Govt bond interest is a part of box 1a $$....but whether the Mutual funds you have actually held any US bonds at all, depends on what mutual funds you own.....so all of box 1a could be simply stock dividends or Corporate Bond interest...which is both Federal and State taxable.

2) Tax-Exempt Municipal bond interest from Mutual funds is reported in box 11.....that also depends on what Mutual funds you had, and whether that Mutual fund held any Municipal bonds at all. Many hold only Stocks. So box 11 could well be empty.

______________________________________

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*

SteamTrainAnswer

Level 15

@jr72 OK, some seat-of-the-pants thinking, subject to, perhaps , someone's more knowledgeable comments/info.

_________________________________________

Yeah, sometimes certain Bond dividends are confusingly called interest too. It's not actually "dividends from interest"

1) Dividends from stock holdings are always called dividends.

2) The interest from bonds, (Company, State, Municipal, or US Govt ) are sometimes confusingly, or interchangeably called dividends too...when it's really just interest. BUT .. The "dividends derived from interest" that Alabama refers to as being exempt from AL taxation?......they may actually be referring to $$ in box 1a of a 1099-DIV form. IF you hold any mutual funds, they will note all the stock dividends + interest from US Govt bonds they held in box 1a of a 1099-DIV form...so that number in box 1a is mixed stock dividends plus US Govt Bond interest. So they are telling you that the US Govt portion of box 1a on the 1099-DIV form is eligible to not be taxed by AL...and can be broken out to not be included in AL taxable income.

3) the "Alabama municipal obligations which are received from a regulated investment company." (as noted already by @ErnieS0 above) will be on that 1099-DIV form in box 11, but will be mixed with $ from municipal bonds of all the other states that your Mutual fund may hold. Box 11 $$ on the -DIV form are commonly referred to as "exempt interest-dividends", i.e. both designations....kind of a "whichever you want to call them" term.

______________________

then #4)

4) Credit Unions refer to their interest issued as "dividends", probably because Credit Unions are considered customer owned.....but it is all reported on a standard 1099-INT form and never on a 1099-DIV ....so it's really "interest".

___________________________

yeah. ARRRRGHHH !!

____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*