SOFA-CFE · Question #172
Tax law includes a provision that 50 percent of the tax-exempt interest income and the dividends- received deduction are exempt from taxation.
The correct answer is B. False. B is correct because no tax law provision combines tax-exempt interest income and the dividends-received deduction (DRD) under a single "50 percent exempt from taxation" rule - this statement is a fabrication that conflates two distinct concepts. Tax-exempt interest income…
Question
Tax law includes a provision that 50 percent of the tax-exempt interest income and the dividends- received deduction are exempt from taxation.
Options
- ATrue
- BFalse
How the community answered
(39 responses)- A26% (10)
- B74% (29)
Explanation
B is correct because no tax law provision combines tax-exempt interest income and the dividends-received deduction (DRD) under a single "50 percent exempt from taxation" rule - this statement is a fabrication that conflates two distinct concepts.
Tax-exempt interest income (e.g., from municipal bonds) is 100% excluded from regular taxable income, not merely 50%. Saying only half is exempt fundamentally mischaracterizes how tax-exempt status works.
The dividends-received deduction is not a flat 50% exemption either - corporate DRD rates vary by ownership stake: 50% for less than 20% ownership, 65% for 20–80% ownership, and 100% for 80%+ ownership (affiliated groups), applied as a deduction, not an exemption provision paired with interest income.
Memory tip: If income is truly "tax-exempt," the word itself tells you it's fully exempt - not half. Any exam choice claiming a single percentage applies to both concepts should raise a red flag, since they operate under entirely separate rules.
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