On form 1099-DIV are exempt-interest dividends taxable? IF not why are they included with income?

[Hal_Al · Accepted solution]

They are exempt from fedearl tax. Most exempt dividends (box 10 of the 1099-div) are taxable on the state return.

They may show on your "income summary" worksheet, but they  go only to line 8b on your form 1040.

Tax exempt interest and dividends are included in  some MAGI (Modified Adjusted Gross Income) calculations to determine your eligibility for some tax benefits (e.g. health care premium tax credits).

[wkcranberry]

They may also be taxable if the tax exempt interest relates to private activity bonds in which case your AMT calculation is affected.  Your Medicare premiums, if applicable is based on the MAGI of a previous year, so they can increase your Federal and state income taxes and/or Medicare premiums.

[KathrynG3]

After entering information on the 1099-DIV screen in TurboTax, you'll see a screen Tell us if any of these uncommon situations apply and then Tell us more about your exempt-interest dividends to capture the additional details.

[DianeW777]

If you mean you paid a premium to purchase a bond that has already accrued interest before your purchase you can report the interest and enter the amortizable bond premium adjustment or ABP Adjustment (see below).

You have a choice.  First, you can choose to add this to the cost basis of the bond which would reduce gain on the redemption/sale in the future.  Or, if you choose to reduce the tax exempt interest by the premium paid for the bond, it must be amortized as described below.

Amortizable bond premium. 

If you elect to reduce your interest income on a taxable bond by the amount of taxable amortizable bond premium. But identify the amount to be subtracted as "ABP Adjustment.".  The premium is amortized over the life of the bond on a pro-rata basis.

However, if the payer reported to you a net amount of interest income on the bond reflecting the offset of the gross amount of interest income by the amortizable bond premium, no reduction of the amount of interest income reported to you by the payer is needed on Schedule B for the bond.

Follow these steps to make a manual adjustment for the bond premium you paid on your tax-exempt and taxable bonds:

1. Select Federal Taxes
2. Under Wages & Income select Interest on 1099-INT
3. Enter your 1099-INT information, select Continue
4. Select I need to adjust the taxable amount, select Continue
5. Enter the state that pays your tax-exempt interest, select Continue
6. Enter the amount of your premium adjustment (use a negative number if you need to add to the interest reported)
7. Select the Reason for Adjustment - ABP Adjustment
8. See the image below