Because mutual funds invest in state and local bonds, some of the dividends they distribute may be exempt from federal tax. If you received such dividends and they are not included in your federal adjusted gross income (FAGI), you may have to add them back to Minnesota taxable income on your state return.
The addition of federally exempt interest dividends should be done as follows:
If at least 95 percent of the dividends came from bonds issued by state or local governments in Minnesota, add back only the portion that came from governments outside of Minnesota.
If less than 95 percent of the dividends came from state or local governments in Minnesota, you must add back the full amount of the dividends.
Funds stand independently
Each mutual fund stands on its own for this calculation. You cannot group them to alter the percentages.
How to report
To report the tax-exempt interest dividends, enter the amount on Schedule M1M, Income Additions and Subtractions. Include the schedule when filing Form M1.