Tax & EvaluationQuestion 100 of 110
A shareholder of a municipal bond fund receives $900 of income distributions and a $500 capital gains distribution. The federal tax treatment is:
a.Both amounts are exempt from federal income tax
b.Both amounts are fully taxable as ordinary income
c.The income is taxable and the capital gain is exempt
d.The income distribution is generally exempt from federal income tax, while the capital gains distribution is taxable
Explanation
Interest passed through from municipal bonds keeps its federal tax-exempt character, but gains the fund realizes from selling bonds are taxable capital gains. Investors often assume a municipal fund is entirely tax free, which is why this distinction matters. Certain private activity bond income may also be subject to the alternative minimum tax.
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