What is the federal tax treatment of exempt-interest dividends reported on Form 1099-DIV, Dividends and Distributions? Exempt-interest dividends are: O Not taxable at the federal level. However, taxpayers are still required to report the income on their tax return. Taxable as ordinary income on the federal return. Not taxable at the federal level and are not reported on the federal tax return. Taxable as long-term capital gains on the federal return.