Personal Investors

2002 Tax Information for Vanguard Municipal Bond Funds

This document provides important information that can help you report your earnings from Vanguard municipal bond funds on your year-end tax returns. It contains:

  • Tax facts: provides important information about IRS requirements for reporting income from Vanguard municipal bond funds.
  • Tax charts: "Tax-Exempt Income by State for 2002" and "Assets by State as of December 31, 2002" supply tax information you may need to complete your state or local tax returns.
  • Questions and answers: provides answers to several frequently asked questions about tax-exempt funds. Note: our associates cannot provide tax advice; if your tax situation is complex or if you are uncertain about the interpretation of a specific rule, we recommend that you seek advice from a qualified tax professional.

Important tax facts about reporting income from these funds

  1. IRS reporting requirement
    You must report all dividend and capital gain income on your income tax return. Although dividends from municipal bond funds are generally exempt from federal income tax, you must still report them on your tax return.
  2. Save your year-end statements
    For a full accounting of taxable and non-taxable income earned on investments in Vanguard municipal bond funds, you or your tax preparer will need your year-end account statement and (if applicable) your copy of IRS For 1099-DIV. If you discard either one, you may be unable to file your income tax return accurately. Duplicate copies of each can be requested from Vanguard.
  3. What it means if you don't receive Form 1099-DIV
    Form 1099-DIV shows any taxable income of $10 or more on your Vanguard municipal bond fund investments, including short-term and long-term capital gains. Even if you did not receive Form 1099-DIV, you must still report any income from your Vanguard municipal bond funds investments to the IRS. The amount of this income is on your year-end statement.
  4. What Form 1099-DIV does NOT include
    Form 1099-DIV does not include any tax-exempt dividends earned on your Vanguard municipal bond fund investments. This information is found only on your year-end account statement.

Vanguard municipal bond funds: Tax-exempt income by state as of December 31, 2002

100% of the income distributions (dividends) you received from Vanguard municipal bond funds is exempt from federal income tax. A portion of this dividend income may also be exempt from state or local tax, depending on the state and local tax laws that apply where you file your returns.

The chart below lists the portion of dividend income that was earned by each of the Vanguard municipal bond funds in each state and U.S. territory during 2002. This is the portion of your dividend income that may also be exempt from your state or local taxes. Depending on your state and local laws, you may be able to reduce the taxable income that you must report by the percentage shown below for the funds you are reporting. The dividend income earned from obligations issued by U.S. territories is generally exempt for state purposes. Therefore, you should add the "Outside United States" percentages shown at the bottom of the chart to your state exempt percentage for a total exempt amount.

Note: Please refer to your Vanguard® year-end account statement for the nontaxable portion of your income. Also note that dividends from these funds may be subject to the federal alternative minimum tax. For further information, please refer to the Vanguard insert Alternative Minimum Tax—Tax-Preference Dividends by Fund.

State Tax-Exempt Money Market Fund Short-Term Tax-Exempt Fund Limited-Term Tax-Exempt Fund Intermediate-Term Tax-Exempt Fund Insured Long-Term Tax-Exempt Fund Long-Term Tax-Exempt Fund High-Yield Tax-Exempt Fund

Alabama

1.26%

1.17%

0.76%

0.37%

2.20%

0.01%

1.53%

Alaska

1.04%

1.96%

1.73%

0.26%

0.42%

0.13%

0.05%

Arizona

0.55%

3.31%

1.84%

1.97%

2.18%

1.09%

2.04%

Arkansas

0.81%

0.00%

0.00%

0.00%

0.38%

0.00%

0.11%

California

5.90%

2.85%

4.15%

7.50%

4.96%

8.06%

8.01%

Colorado

5.23%

1.57%

5.78%

3.74%

4.20%

5.05%

2.92%

Connecticut

0.18%

3.34%

1.82%

1.87%

0.68%

0.60%

1.95%

Delaware

0.32%

0.30%

0.25%

0.02%

0.63%

0.00%

0.00%

District of Columbia

3.47%

0.71%

1.82%

1.49%

0.36%

1.36%

1.91%

Florida

3.30%

3.94%

3.21%

3.48%

5.74%

1.58%

1.88%

Georgia

5.47%

3.33%

3.94%

4.02%

4.27%

3.93%

1.37%

Hawaii

0.90%

1.62%

3.51%

3.39%

3.77%

1.91%

0.64%

Idaho

0.59%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

Illinois

8.33%

5.80%

6.99%

5.13%

8.85%

7.97%

4.74%

Indiana

2.22%

1.06%

0.78%

0.07%

0.60%

1.15%

1.98%

Iowa

0.61%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

Kansas

0.73%

0.37%

0.47%

0.00%

0.38%

0.07%

1.26%

Kentucky

2.44%

0.42%

2.70%

1.44%

2.36%

1.31%

0.47%

Louisiana

0.19%

0.78%

1.61%

1.35%

1.29%

2.64%

0.81%

Maine

0.22%

0.00%

0.00%

0.00%

0.00%

0.00%

0.24%

Maryland

1.33%

0.03%

0.17%

0.31%

1.77%

1.42%

3.33%

Massachusetts

2.64%

5.23%

3.77%

7.71%

4.79%

6.49%

6.04%

Michigan

4.86%

1.79%

4.39%

3.14%

4.11%

3.52%

1.90%

Minnesota*

1.00%

1.31%

0.98%

0.38%

1.99%

0.00%

1.42%

Mississippi

0.27%

1.67%

0.64%

0.98%

0.00%

1.07%

0.01%

Missouri

1.85%

0.94%

0.17%

0.61%

0.20%

0.97%

0.89%

Montana

0.00%

0.04%

0.07%

0.13%

0.00%

0.00%

0.00%

Nebraska

1.38%

0.32%

0.00%

1.12%

0.67%

0.00%

1.18%

Nevada

0.55%

3.41%

1.40%

3.16%

0.26%

1.58%

0.00%

New Hampshire

0.24%

0.17%

1.37%

0.78%

0.25%

1.85%

0.40%

New Jersey

0.92%

4.68%

3.41%

7.56%

8.05%

2.54%

7.09%

New Mexico

1.62%

0.94%

0.71%

0.33%

1.57%

0.73%

1.87%

New York

1.93%

6.14%

6.82%

10.25%

8.02%

8.62%

9.43%

North Carolina

1.68%

0.90%

0.59%

0.18%

0.55%

1.09%

2.49%

North Dakota

0.00%

0.00%

0.00%

0.00%

0.42%

0.00%

0.00%

Ohio

2.32%

4.69%

4.62%

3.06%

1.22%

0.63%

2.28%

Oklahoma

0.04%

1.64%

1.00%

1.24%

0.00%

0.00%

1.99%

Oregon

1.49%

1.22%

1.24%

0.82%

1.36%

1.00%

1.29%

Pennsylvania

4.86%

7.21%

3.78%

4.34%

5.44%

3.71%

7.19%

Rhode Island

0.47%

3.68%

0.96%

0.40%

0.00%

0.00%

0.13%

South Carolina

0.29%

1.31%

1.12%

0.84%

0.69%

2.13%

0.77%

South Dakota

0.20%

0.00%

0.41%

0.05%

0.56%

0.00%

0.00%

Tennessee

2.60%

1.39%

0.97%

0.47%

1.31%

0.86%

1.50%

Texas

15.59%

13.64%

13.85%

12.26%

10.41%

18.88%

10.34%

Utah

1.45%

0.33%

0.99%

0.58%

0.93%

0.17%

0.87%

Vermont

0.04%

0.21%

0.00%

0.00%

0.00%

0.00%

0.00%

Virginia

1.04%

2.80%

2.05%

0.42%

0.72%

0.54%

4.50%

Washington

2.26%

0.91%

2.64%

1.12%

0.68%

1.64%

1.57%

West Virginia

0.54%

0.22%

0.41%

0.24%

1.12%

0.63%

0.28%

Wisconsin

2.33%

1.33%

0.98%

1.16%

0.00%

1.96%

0.00%

Wyoming

0.04%

1.89%

0.01%

0.01%

0.01%

0.00%

0.01%

Outside United States

Guam

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

Northern Mariana Islands

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.37%

Puerto Rico

0.46%

0.01%

0.00%

0.52%

0.00%

0.83%

0.22%

Virgin Islands

0.00%

0.00%

0.00%

0.07%

0.00%

0.33%

1.36%

Note: The information provided in this chart applies to all share classes in a fund (including Investor and Admiral™ Shares).

*Minnesota requires that 95% of dividends be derived from Minnesota-source obligations in order for the income to be exempt from state tax. None of the funds meet the criteria for 2002. Therefore, all dividend income from these funds is subject to Minnesota state income tax.

Vanguard municipal bond funds: Assets by state as of December 31, 2002

The table below lists the percentage of assets that each of the Vanguard municipal bond funds had invested in each state and U.S. territory at the end of 2002. This information will help you determine state or local intangible or personal property tax payments if they are required by your state or locality for 2003.

Note: Not all state and local governments require residents to pay intangible or personal property taxes. Please call your state and local tax offices to check their requirements.

State Tax-Exempt Money Market Fund Short-Term Tax-Exempt Fund Limited-Term Tax-Exempt Fund Intermediate-Term Tax-Exempt Fund Insured Long-Term Tax-Exempt Fund Long-Term Tax-Exempt Fund High-Yield Tax-Exempt Fund

Alabama

0.90%

0.41% 0.60% 0.35% 0.52%

0.00%

0.81%

Alaska

1.23% 1.52%

1.25%

0.41% 0.38% 0.06% 0.00%

Arizona

1.02%

3.16%

1.64% 1.95% 3.15% 1.26% 2.02%

Arkansas

0.78% 0.00% 0.00% 0.00% 0.33% 0.00% 0.11%

California

7.39% 4.61% 5.53% 9.98%

5.38%

10.49%

11.36%

Colorado

4.33%

2.30%

4.13%

3.82%

5.31%

4.31%

3.24%

Connecticut

0.04%

2.47%

1.68% 1.80% 0.73% 0.19% 2.43%

Delaware

0.46%

0.53%

0.52%

0.00% 0.47% 0.00% 0.00%

District of Columbia

4.14% 0.21% 1.39% 1.35% 0.57% 1.42% 1.79%

Florida

2.75% 2.50% 3.00% 3.51% 4.66% 1.42% 2.76%

Georgia

3.91% 4.93% 4.43% 3.59% 3.64% 3.48% 0.78%

Hawaii

0.78%

0.96%

2.89% 3.00% 5.04% 2.21% 1.11%

Idaho

0.38% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Illinois

10.40%

6.71%

6.21% 4.86% 8.93% 7.42% 4.64%

Indiana

2.53% 0.37% 0.71% 0.05% 0.53% 0.98% 1.83%

Iowa

0.23%

0.00% 0.00%

0.00%

0.00%

0.00% 0.00%

Kansas

1.39%

1.63%

0.93%

0.06% 0.33%

1.30%

1.05%

Kentucky

2.28% 0.81% 2.64% 1.31%

2.38%

1.36% 0.83%

Louisiana

0.05%

0.45%

1.31% 1.11% 0.95% 2.51% 0.71%

Maine

0.32% 0.00% 0.00% 0.00% 0.00% 0.00% 0.23%

Maryland

0.74%

0.00% 0.19% 0.61%

1.59%

1.30%

2.88%

Massachusetts

2.65% 4.12% 5.13% 8.58% 5.38% 6.57% 5.23%

Michigan

4.68% 3.23% 4.33% 3.29%

3.63%

3.78% 1.70%

Minnesota*

1.16%

1.56% 1.20% 0.36% 1.74% 0.00% 2.29%

Mississippi

0.32% 1.09% 0.52% 0.92%

0.00%

1.04% 0.00%

Missouri

2.06% 3.64% 0.54% 0.57% 0.19% 0.71%

0.88%

Montana

0.00%

0.00%

0.00%

0.12%

0.00% 0.00% 0.00%

Nebraska

1.62%

0.38%

0.00% 0.98% 0.43% 0.00% 1.33%

Nevada

0.28%

1.93%

2.06% 3.16% 0.87% 1.06% 0.00%

New Hampshire

0.23% 0.15% 0.81% 0.59% 0.00% 1.70%

0.42%

New Jersey

1.42%

4.22%

4.06%

6.87%

7.36% 2.16%

6.71%

New Mexico

0.63% 0.67% 0.57% 0.28% 1.34% 0.66% 2.15%

New York

3.10%

8.30%

10.05% 11.03% 9.91% 10.54%

10.55%

North Carolina

2.53% 1.33%

0.57%

0.54%

0.51%

0.99%

2.31%

North Dakota

0.00% 0.00% 0.00%

0.00%

0.35% 0.00% 0.00%

Ohio

3.05%

3.66% 3.92% 3.03% 1.57% 0.61% 3.38%

Oklahoma

0.00%

1.29%

1.12%

0.39%

0.00%

0.00%

1.22%

Oregon

1.19%

1.27%

0.36% 0.66%

1.25%

0.97% 1.23%

Pennsylvania

4.06%

7.19%

3.26% 4.15% 5.09% 3.02%

4.93%

Rhode Island

0.15%

3.29%

0.90% 0.32% 0.00% 0.00% 0.13%

South Carolina

0.55%

1.35% 0.88% 0.78% 1.04% 2.09% 0.53%

South Dakota

0.26% 0.00%

0.30%

0.04% 0.41% 0.00% 0.00%

Tennessee

2.11%

0.67%

0.90% 0.47% 1.35% 0.33%

1.65%

Texas

13.93%

14.29%

13.84%

11.19%

9.61%

18.27%

8.89%

Utah

1.93%

0.54%

0.67%

0.51% 0.87% 0.16% 1.01%

Vermont

0.00%

0.15%

0.00% 0.00% 0.00% 0.00%

0.00%

Virginia

1.12% 2.33% 2.31%

0.39%

0.57%

0.55%

4.00%

Washington

1.73% 1.43%

2.49%

0.96%

1.26%

1.63%

1.57%

West Virginia

0.53%

0.15%

0.35%

0.23% 0.95% 0.56%

0.27%

Wisconsin

2.87% 0.44% 0.83% 1.02% 0.00%

1.79%

0.00%

Wyoming

0.00%

0.00% 0.00% 0.00% 0.00% 0.00%

0.00%

Outside United States

Guam

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.27%

Northern Mariana Islands

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.37%

Puerto Rico

0.00% 0.17%

0.00%

1.03%

0.00%

0.83% 0.00%

Virgin Islands

0.00%

0.00%

0.00%

0.05%

0.00%

0.27%

1.43%

Note: The information provided in this chart applies to all share classes in a fund (including Investor and Admiral™ Shares).

*Minnesota requires that 95% of dividends be derived from Minnesota-source obligations in order for the income to be exempt from state tax. None of the funds meet the criteria for 2002. Therefore, all dividend income from these funds is subject to Minnesota state income tax.

Answers to frequently asked questions about tax-exempt funds

Q. How can I owe federal taxes on a "tax free" bond fund?
A. The monthly income (dividends) paid by your fund is not subject to federal income tax. However, any short-term or long-term capital gains the fund pays are fully taxable and are reported on Form 1099-DIV.

Q. Where is my tax-exempt income reported?
A. Your tax-exempt income is reported on the year-end account statement provided by your fund. Although tax-exempt income is not subject to federal income tax, you must report it on IRS Form 1040, line 8b.

Q. How can I determine my state and local tax liability on this investment?
A. The charts in this document ("Vanguard municipal bond funds: tax-exempt income by state for 2002" and "Vanguard municipal bond funds: assets by state as of December 31, 2002") provide information to assist you in determining your state tax liability. For complete information on your state and local tax liability, we recommend that you consult a qualified tax professional.

Q. Why aren't all of the fund's distributions—tax-exempt income and taxable income—reported on Form 1099-DIV?
A. IRS rules prohibit reporting tax-exempt income on Form 1099-DIV.

Q. Why are short-term capital gains listed as ordinary dividends on Form 1099-DIV?
A. The IRS requires Vanguard to report any short-term capital gains as ordinary income on Form 1099-DIV. Short-term capital gains are taxable distributions.

Q. Do I need to save my year-end account statement?
A. Yes. This statement includes important information that you will need to prepare your income tax return.

Q. I reinvest all distributions to purchase more shares of the fund. Do I still owe taxes on them?
A. Yes. Any distributions of short-term or long-term capital gains are taxable, even if you reinvest the distributions in more shares.

Q. Can my investment in a tax-exempt bond or money market fund have an impact on my alternative minimum tax liability?
A. If your tax-exempt bond or money market fund invests in "private activity bonds," you may be subject to the alternative minimum tax (AMT). Interest income from certain private activity bonds is exempt from federal income tax but may be a tax-preference item for the AMT. See Vanguard's insert entitled Alternative Minimum Tax—Tax-Preference Dividends by Fund to see whether your fund distributed income that is considered this type of tax-preference item.

Q. How do I know if I am subject to the AMT?
A. Many taxpayers are not subject to the AMT. To determine if the AMT applies to you, complete IRS Form 6251, Alternative Minimum Tax—Individuals (available on the IRS website).

 

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