Dividend from Interest

[jr72]

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.

[ErnieS0]

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.

[SteamTrain · Accepted solution]

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

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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".

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yeah.  ARRRRGHHH !!

[jr72]

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 · Accepted solution]

@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.

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[jr72]

That information is good to know.  So I shouldn't rely on box 11 solely.

More specific, I was dealing with US government obligations for income derived (dividends derived from interest I believe is what that is) and intangible property tax.  I have a letter with what these two should have percentage-wise.  So I should use box 1a when dealing with these percentage exemptions and calculate myself and ignore the fact that box 11 is empty.

[jr72]

@SteamTrain @ErnieS0 When I look at the Alabama Schedule B form.  How would it populate?  The form is like this.

Interest section has Exempt Interest column and Taxable Interest column for the rows.

Dividend section has no Exempt Interest column and a Taxable Dividend column for the rows.

From the instructions "dividends derived from interest" is to be put in the "Exempt Interest" column  of the interest section.  So filling out looks challenging.

So I would have $$ exempt interest for the dividend in the interest section followed by zero taxable interest on the same row.  The other part which is dividend, I would put that amount in an empty row in the dividend section under Taxable Dividend column.  I guess that would be how it would have to show up.  Right?  Then, I guess I would follow this pattern for all brokerages.

So the numbers would be split between interest and dividend sections with interest section having zero taxable.  Sound right to you even though the form would look odd?

[SteamTrain · Accepted solution]

I have no idea how it would look on the actual form.   I just enter all the proper data in the Federal section of the software and let it place the $$ in the proper lines of the state forms.   Certainly there "can" be software errors in those transfers, but someone would have to point out a specific potential software error, and an example, before it could be investigate...there are simply too many paths to follow.

That being said:

1) I know nothing about intangible property taxes...or what exactly it refers to.

2)  US Government Interest comes from some % of box 1a on a 1099-DIV form PLUS box 3 on a 1099-INT.

3)  Exempt interest-dividends come from  box 11 of a 1099-DIV form plus box 8 of a 1099-INT form....but what is exempt from AL income would be a sub-% of those $$ values depending on what portion actually came form AL bonds.   Don't subtract any if you don't know how to calculate the exact amount that came from AL bonds.

I don't have AL software, so I can't see where each of these ends up.

[jr72]

@SteamTrain I'm trying to understand US Government Obligations so I think #2 on your list is what I'm concerned about.

The letter says I may have a mutual fund where "total income [is] derived from U.S. government obligations" based on the letter.  Looking at the list in the letter, I see a mutual fund I have. The state tax says I can exempt interest based on "percentage of dividends derived from interest on United States obligations and/or Alabama municipal obligations which are received from a regulated investment company."

So I just use box 1a as we discussed since box 11 is only for #3 on your list.  Because my entire 1099-DIV is based on $$ for one fund and no other funds, I just need a percentage taken out and that's it.  The interest section will have interest exempt $$ with zero taxable interest.  The remaining dividend $$ part of the % will be in the dividend tax section which has no dividend exempt section (because that probably would make no sense).  Simple and straight forward arithmetic.

For #3 you have there, I have zero in box 11 so I just won't deal with any of that.

I think I have this now.  Correct?

[SteamTrain]

Sounds about right.....Most folks have stocks or other mutual funds that feed into box 1a of a 1099-DIV, but if you only have one mutual fund creating the box 1a value, and no individual stocks …then it's just a % of the box 1a value , based on what % the Mutual fund publishes as coming form US Govt bonds.   I just have no idea where that value ends up in the AL forms.

[jr72]

Okay.

Finally on final end page of all of this.

#1 I can't do, based on research I did.

#2 I can do percentage.

#3 I can't do, no $$ in box 11

AL instructions explicitly has this under interest section under exempt interest.  So, that's where it's going.

I think I'm done.  Ugh, I'm tired.