In the May 18 column, I described the working of money market funds, sending a clear message that I think a money market fund is the preferred medium for short-term savings.

I said the various savings institutions were "pressing, individually and through their trade associations, for legislation which would force the funds to give up checking privileges or at least require them to meet the same reserve requirements the banks do."

The American Bankers Association says this is not entirely true. Here is their letter of May 20 from Fritz M. Elmendorf, assistant director of public relations, so you can get their side of the story.

"Your May 18 column on the advantages of money market funds is rather thorough, but it leaves one with the unfortunate impression that full-service banks are not interested in competing directly with the money market funds but are only interested in eliminating some of their advantages.

"This is not the position of the American Bankers Association, which represents more than 90 percent of this nation's banks. We have stated consistently that deregulation is the key to competitive equity between despository and nondepository institutions. We have long supported the phase-out of interest rate ceilings, and we are currently supporting a stepped-up phase-out plan.

"Bankers believe there is an inequity, however, when they are required to set aside reserves against their checking accounts, while money market funds have no similar requirement. Requiring reserves on money market funds is not the only way to resolve this inequity, but we do believe that it is important that there be equity in competition."

Question: In a recent article I read that "income from interest and dividends is taxed at higher rates -- up to 70 percent -- than wage/salary income." My accountant says "not so -- it is taxed as ordinary income." I'm confused. Will you please clarify?

Answer: Either statement may be true, depending on the income level of the taxpayer.

Normally interest and dividends, after a $200-per-taxpayer exclusion, are simply added to income from other sources (including wages and salary). The whole package is then taxed as ordinary income, as your accountant says.

But if your income puts you into a tax bracket grater than 50 percent, then there is a difference.

The maximum tax on personal-service income is 50 percent. Personal service income -- also called earned income -- includes pension and retirement pay as well as wages and salary.

Income classed by the IRS as unearned -- principally interest and dividends -- is not sheltered by that 50 percent ceiling. If your total income is high enough, then interest and dividends may be subject to a tax rate as high as 70 percent.

The IRS designed Form 4726 ("Maximum Tax on Personal Service Income") for taxpayers in that situation. This form, to be used in conjunction with Form 1040, provides for the separation of income into the two categories and calculation of the maximum 50 percent tax on that portion of income which is earned.

So it is true that interest and dividends may be taxed at a higher rate than wages or salary, but only for a high-income taxpayer in the 50 percent or higher tax bracket.

CORRECTION: In the March 23 column I wrote that the election to take reduced civil service retirement pay to provide for a survivor's annuity after your death did not constitute a taxable gift at that time.

I goofed. Such an election does in fact constitute a taxable gift to the survivor beneficiary. The gift is considered made on the date the Office of Personnel Management approves the election.

A gift tax return is required on Form 709. To get the value of the survivor's annuity, write to the Internal Revenue Service, Attn: E:A:G 1111 Constitution Ave. NW, Washington, D.C. 20224.

Include in your letter all the information from your Civil Service Annuity statement (a facsimile copy of the statement itself is fine) plus your birth date and that of the beneficiary.

There probably will be no tax payable because of the $47,000 unified (estate and gift) tax credit. But you do have to file the return.

My apologies for this error and any confusion it may have caused.