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I'm deathly afraid of having to report bond/stock earnings to Uncle Sam. I feel like my tax returns are complex enough and I don't want to deal with any additional complexity. I'm looking for a way to safely invest the money I'm saving for a down payment on a car (about 5 years away) without complicating my taxes. I've maxed out my Roth IRA for the year so that's not an option.

I heard about these tax-exempt bond funds. If I buy a tax-exempt bond fund, will I have to report the earnings from it on my taxes?

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  • How do you prepare your taxes? Turbotax?
    – Michael Pryor
    Commented Aug 5, 2010 at 20:39

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At the end of the year, the mutual fund company sends you a statement like any other investment and it has a bunch of boxes that you copy into your tax return software. Then you just check the box that says 'tax-exempt' and you're done.

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Tax-exempt interest (and dividends attributable to tax-exempt interest) is required to be reported on Form 1040 line 8b (or the analogous line of Form 1040A). While it is not directly taxed, it does come into play in the calculation of taxable income and various credits. For example, tax-exempt interest is counted when determining the portion of Social Security benefits to be included in gross income.

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