Final answer:
Exempt interest dividends reported on Form 1099-DIV are not subject to federal income tax, as they are paid on investments in municipal bonds.
Step-by-step explanation:
The federal tax treatment of exempt-interest dividends reported on Form 1099-DIV is that they are not subject to federal income tax. These dividends are exempt from taxation because they are paid on investments in municipal bonds. Municipal bonds are issued by state and local governments to fund public projects, and the interest earned on these bonds is typically not subject to federal income tax.
For example, if you receive $1,000 in exempt-interest dividends from municipal bond investments, you do not need to report them as taxable income on your federal income tax return. This means you will not owe any federal income tax on those dividends.
However, it's important to note that while exempt-interest dividends may be exempt from federal income tax, they may still be subject to state and local taxes depending on your specific jurisdiction.