exempt-interest dividends - question about state

[bluepalm]

During the 2025 tax year I purchased three municipal bond CEFs: Invesco municipal opportunity trust; DWS municipal income trust; and Invesco value municipal trust.

Turbotax is asking me what state my exempt-interest dividends are from, but no state is listed on my brokerage tax forms.

Also, if I understand correctly, these funds are exempt from federal tax. I am not sure if they actaully are exempt from state tax. 

So far as I know all of these funds are a big blend of different bonds, so the bonds could be issued from a very large number of states. 

What should I do in this situation? 

[ThomasM125]

You don't have a problem on your federal return since the bonds are exempt from taxation there. As far as the state is concerned, the bonds are only tax exempt if they pertain to the state you live in. Since it seems you cannot ascertain if any of the income is from your state, you can just not assign any of it to your state and it will all be taxable there. In that case, you can choose the "multiple states" option when asked what state your interest belongs to. 

[bluepalm]

Thanks for you reply. I tried to do what you suggested, the only issue is when I select multiple states, it's then requiring me to select each state and the also to enter the exempt-interest dividend amount for each state. It won't let me continue without entering this information, so I'm stumped. 

[baldietax]

This is a common situation, brokerages don’t generally list state breakdown for third party funds you have to calculate it and input after the 1099.

you need to go to the website for those funds, they will have a tax center or fund info with a year- tax supplement which breaks down the % by state for each fund

if you have multiple funds on the same 1099 you need to calculate the total amounts offline based on income from each fund.

you don’t need to input each state just whatever is exempt i.e.  your home state and don’t miss the US territories  like Puerto Rico are often state tax exempt (your state tax code will specify somewhere); and the rest that is taxable you can just enter together as “multiple states” or “more than one state”.

then check you get the correct addition to income for state taxes

[baldietax]

(In the state drop-down at the end of the list I think is the option for “more than one state”)

[Hal_Al · Accepted solution]

The simple solution is just choose "More than one state"*

You get the break down by state from your mutual fund company. If they did not provide a breakdown, you check the box “I earned tax exempt dividends in more than one state” ("Multiple States" in the  online program) on the first screen after entering the 1099-INT or 1099-DIV. Then select  "More than one state" at the bottom of the state  scroll down list.

If your mutual fund company provided you a breakdown**, you are only interested in your home state***. Multiply the % for your state by your total tax exempt dividends to get a $ amount (you can't enter the % in TurboTax [TT]). When asked which state, check the box "I earned tax exempt dividends in more than one state". In the drop down menu, select your state and enter the $ amount you calculated. In the 2nd box, select "More than one state*" (at the bottom of the scroll down list) and enter the remaining dollar amount.

*If you don't want to mess with it, it is perfectly acceptable to assign the entire $$ amount to the single designation of "more than one state” / “Multiple States" 

**Most mutual funds will provide a breakdown. But you usually have to ask for it, or find it on their web site.

***Your state will tax all the dividends except the dividends from municipal bonds  from your state and US Territories.

[dabearbady]

Sorry, no, just entering "Multiple States" and hitting Continue worked with TurboTax for prior tax years, but for the current version of 2025 TurboTax at this posting, that definitely does not work--I tried it. If your 1099 reports exempt dividend income, you MUST enter one actual state and some amount of tax-exempt dividends for that state before you are allowed to choose Multiple States for the balance, and whatever you enter has to add up correctly to the total. (Normally you would do this for the state(s) in which you were filing state income tax returns.) If you don't split it out this way in 2025 TurboTax, you are not allowed to proceed and get the dividends area of your return marked as completed. It's a real time-wasting nuisance this year, because at least in my case, and I expect many others, it will make no difference in state income tax due.

[Hal_Al]

Thanks for pointing that out,  That appears to be an update that occurred this year.

I have download Deluxe.

It's actually much easier, now.  At the screen titled "Tell us more about your tax-exempt dividends" you are first presented 2 boxes, your resident state and  "Multiple States".  For this situation, enter 0 in the home state box and the total box 12 (1099-DIV) amount in "Multiple States". 

[dabearbady]

Yes, that's a good workaround too, particularly for those taxpayers who can't easily find how much exempt dividend income was attributable to particular states. It doesn't always get reported to taxpayers in an easily found place. I think in my case, $20 was tax exempt in my state. So I might save a buck. Gee thanks.

The only reason somebody needs to care about this is if they have a large amount of exempt dividend income (say, from municipal bonds or other tax-exempt mutual funds), and most or all of it was attributable to the one or more states for which they have to file a state income tax return. In a state with high state income tax rates where that income can be excluded, it might make enough of a difference to care about. Most people... pfft!

[NN24]

I put the number for my home state and Multiple States, but I don't see it carried over to my home state for the amount that I enter? My 1099 DIV - box 12 has $ 1682.71. I live in VA. I calculate exempt-interest dividends from VA is $32.64 and Multiple States is $1650.07. I put it as VA and Multiple States when TurboTax asks for where the exempt-interest dividends from. The $32.64 should be subtracted from VA income and $1650.07 should be added from VA income automatically when it's carried over to VA tax return correct? Why I see the AGI is the same as Federal level and there's no subtraction or addition for these amount on my VA tax? Is there a glitch in TurboTax or do I need to add/subtract manually in VA tax? Thank you.

[baldietax]

the 32.64 is already excluded from Federal income so it won't be subtracted.  The $1640.07 should be an addition to income.

are you on desktop, there is an annoying bug in the entry form which can leave it stuck assuming all the income is VA even if you enter multiple states, if you look on the 1099-DIV worksheet in Forms mode, the very last line for Box 12 has "state where the dividends were earned" which should have XX to use the table not VA, see screenshots below

also note VA exempts territories do don't forget Puerto Rico etc if there is some % from those you can save a few more bucks.

error - will show all VA exemptcorrected - will use the table

[Hal_Al]

The $1650 goes on line 1 of form 763ADJ, as an addition to income.  The $32.64 will not go anywhere on the forms.