 Tax-exempt interest not really taxable
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 Dear
Tax Talk,
The 1099 form from my broker shows the amount I earned as tax-exempt interest. I thought that tax-exempt interest wasn't subject to tax. So why is it reported to the IRS?
-- Betty
Dear Betty,
Relax. You're still exempt on your
tax-exempt interest unless you have Social Security benefits. So that state and
local governments can issue bonds at lower interest rates (basically borrow cheaper),
the interest on these bonds is exempt from federal income taxes. However, since
about 20 years ago, when Social Security benefits became partially taxable, the
amount of tax-exempt interest has come into play.
To
find out whether any of your benefits may be taxable, compare the base amount
for your filing status with the total of: - One-half of your benefits,
plus
- All your other income, including tax-exempt interest.
 |
Your base amount is: | |
|
| • | $25,000
if you are single, head of household or qualifying widow(er). | | • | $25,000
if you are married filing separately and lived apart from your spouse for all
of 2006. | | • | $32,000
if you are married filing jointly. | | • | Zero
if you are married filing separately and lived with your spouse at any time during
2006. | |
Your benefits are
partially taxable when you exceed the base amount. However, your tax-exempt interest
does not get included in your taxable income, only your benefits. While the interest
may be exempt, you may end up paying higher taxes, which sounds like government
thinking. To ask a question on Tax Talk, go to the "Ask
the Experts" page, and select "taxes" as the topic. |
