Tax-Exempt Interest

While you don't have to pay ordinary income tax on it, the IRS wants to know how much tax-exempt municipal bond interest you are receiving, and in some cases it can be used to limit your qualification for certain other tax breaks. Therefore, the total amount of tax-exempt interest from state and local municipal bonds, including mutual funds that invest in these bonds, must be reported on line 8b of Form 1040 or 1040A.

Reporting. The IRS requires payors of tax-exempt interest of $10 or more to furnish an annual report to the recipient of the interest and to the IRS. The payor may be the issuer or a corporate paying agent hired by the issuer. The total tax-exempt interest is reported in Box 8 of Form 1099-INT. The amount of tax-exempt income included in Box 8 that is subject to the alternative minimum tax is reported in Box 9.

Work Smart For your own records, you may want to make and retain a list of all of your tax-exempt interest income. You can use a form similar to Schedule B to do it. Just keep it for your files. The IRS doesn't require it.

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