• Interest-free dividends are mutual fund payments that are not subject to federal income tax.

  • Due to high tax rates, wealthy investors often invest in municipal bonds to take advantage of tax breaks.
  • Despite being exempt from federal income tax, interest-bearing dividends on municipal bonds may or may not be exempt from state taxes.
  • Dividend interest may also be subject to an alternative minimum tax (AMT), even if it is exempt from federal or state income tax.
  • Tax-free interest dividends are reported on Form 1099-DIV in box 12.