CLASSIFYING INCOME EARNED BY BOND FUNDS

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in Employment Law,Human Resources

Q: I recently invested in several bond funds. These funds pay out dividends before the end of the year. Are the dividends tax-free? C.W., Portland, Ore.

A: It depends on the type of fund. Generally, the interest earned in bond funds is taxed at ordinary-income rates, reaching as high as 35 percent. But if the fund invests in tax-free municipals, all or part of the interest may be tax-free. In addition, some so-called “bond funds” invest in stocks that may pay qualified dividends taxed at a maximum 15 percent tax rate. Tip: You will receive a breakdown on the types of income on the Form 1099-DIV for 2006.

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