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Classifying income earned by bond funds

by on
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.

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