To enter exempt-interest dividends in UltraTax CS, open the Income folder, go to the B&D screen, and open the Dividend Income statement window. Put the Form 1099-DIV Box 12 total in the Tax Exempt Amount column, add the home-state percentage in the In-State Muni column, and enter the Box 13 private activity bond amount in the AMT field. Those three entries send the income to Form 1040 line 2a, the state return’s addition-to-income line, and Form 6251 line 2g.
What You Need Before You Open the Screen
Three pieces of information have to be in front of you.
The first is Box 12 of Form 1099-DIV, which reports the total exempt-interest dividends paid by the fund.1Internal Revenue Service. Form 1099-DIV – Dividends and Distributions Do not confuse this with Box 10, which is noncash liquidation distributions and has nothing to do with tax-exempt interest.
The second is Box 13, the portion of the Box 12 total that came from specified private activity bonds. Box 13 is already included inside Box 12; it is not added on top.
The third is the fund’s supplemental tax information statement, sent alongside the 1099-DIV. Form 1099-DIV does not tell you which states issued the underlying bonds, and most states only exempt interest from their own municipal obligations. The supplemental statement gives you the per-state percentage breakdown, and it usually restates the private activity bond percentage so you can cross-check Box 13. If the statement is missing, contact the fund.
Entering the Box 12 Amount
In the Income folder, open the B&D screen and then the Dividend Income statement window. This window holds every 1099-DIV line item for the payer.2Thomson Reuters. Form 1099-DIV Data Entry
Enter the payer’s name, then put the Box 12 figure in the Tax Exempt Amount column. UltraTax carries that number to Form 1040, line 2a as tax-exempt interest. It appears on the return but stays out of adjusted gross income, consistent with IRC Section 103.3Office of the Law Revision Counsel. 26 U.S. Code 103 – Interest on State and Local Bonds
The State Allocation Column
Still in the Dividend Income statement window, find the In-State Muni $ or % column.4Thomson Reuters. Enter U.S. Obligations and Exempt Interest for State Return Processing Enter the share of the exempt-interest dividend attributable to bonds issued by the client’s resident state.
The column accepts either a percentage or a dollar amount. If the fund’s statement shows 42% of exempt interest came from California bonds and the client lives in California, type 42.000. UltraTax then treats the remaining 58% as an addition to state taxable income and leaves the 42% exempt at both levels. Enter a dollar figure instead if that is what you have.
The Private Activity Bond Field for AMT
The Box 13 amount goes in the AMT field within the same Dividend Income statement window.5Thomson Reuters. Enter Private Activity Bond Interest Income UltraTax carries the number to Form 6251, line 2g, “Interest from specified private activity bonds exempt from the regular tax.”6Internal Revenue Service. Form 6251 – Alternative Minimum Tax – Individuals This is a preference item under IRC Section 57(a)(5) and is added back when computing alternative minimum taxable income.7Office of the Law Revision Counsel. 26 USC 57 – Items of Tax Preference
Do not add Box 13 to Box 12. Box 13 is a subset of Box 12, and entering it in both places double-counts the income.
Checking That the Numbers Landed in the Right Places
Once the entries are in, open the generated return and confirm three lines.
- Form 1040, line 2a should display the full Box 12 amount as tax-exempt interest. The line reports the income without adding it to AGI.8Internal Revenue Service. Instructions for Form 1040
- Form 6251, line 2g should show the Box 13 amount. If Box 13 was zero, the line should be blank.9Internal Revenue Service. Instructions for Form 6251
- The state return should show an addition to income equal to the out-of-state portion only. If the full Box 12 amount appears as a state addition, the In-State Muni percentage did not flow. Return to the B&D screen and check the column.
If taxable interest or ordinary dividends exceed $1,500, Schedule B will also generate. Tax-exempt interest is listed separately on Schedule B and should not appear in the taxable interest total.10Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends
Mistakes That Break the Flow
A handful of entry errors account for most of the problems preparers see with exempt-interest dividends:
- Entering Box 10 instead of Box 12. Box 10 is noncash liquidation distributions and is unrelated to tax-exempt interest.
- Leaving the In-State Muni column blank. Depending on the state, this can either treat the whole amount as taxable or default to full exemption. Neither result matches the fund’s allocation.
- Skipping the Box 13 AMT entry. Without it, Form 6251 cannot compute the preference item, and the AMT calculation will be off.
- Double-counting Box 13 by adding it to Box 12 or entering it twice. Enter Box 12 as the total and Box 13 only in the AMT field.
One Thing Worth Flagging for Clients
Exempt-interest dividends do not create federal income tax, but they are not invisible on the return. The Box 12 amount feeds into the provisional income formula used to determine whether Social Security benefits become taxable, and it can affect the net investment income tax and eligibility for certain income-based credits. UltraTax handles these downstream calculations automatically once Box 12 is entered, but a client with a large municipal bond position may see effects on other parts of the return that a plain reading of “tax-exempt” does not suggest.