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nterest on tax-free municipal bonds is exempt from regular income tax, but can be subject to the alternative minimum tax unless you buy municipals that are free of AMT.
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The AMT kicks in if the IRS figures you aren't paying enough tax in relation to your income. To calculate AMT, you add certain deductions and exemptions back to your taxable income. Those "add-backs" include interest you earn on municipal bonds. You then pay tax at either a 26 percent or 28 percent rate. While that might be lower than usual, without your deductions and exemptions it's still a sizeable bill. | If you're already subject to the alternative minimum tax, your AMT bond interest is liable to increase your liability. If you're approaching AMT territory, the interest might just kick you over the threshold. Although you might not be able to avoid the AMT, you certainly can keep your tax-free municipals truly tax free.
Here's the deal in a nutshell:
 Generally, interest from "private activity" municipal bonds is subject to the AMT. These are bonds that state and local governments issue to help developers finance private projects, such as stadiums and subdivision roads.
Municipals that are advertised as "high yield" bonds often are subject to the AMT. The extra yield might not compensate for the extra tax.
Many funds load up on AMT municipals to boost yields. Double-check your mutual fund holdings.
Municipal bond funds that are labeled "tax exempt" or "tax free" are permitted to hold as much as 20 percent of their assets in AMT bonds.
The disclosure documents that accompany your bonds are required to state whether the bond interest is subject to the AMT. Think about replacing your AMT debt with AMT-free issues.
"AMT Patch" Applied for 2007 Tax Year
In order to prevent millions more individuals from falling victim to the alternative minimum tax (AMT), a new law increases the AMT exemption amounts for 2007 only. The updated figures are:
- $66,250 for married joint filers. However, the exemption is phased out between alternative minimum taxable income (AMTI) of $150,000 and $400,200. Without the new law, the exemption would have fallen back to only $45,000.
- $44,350 for single taxpayers and heads of household. The exemption is phased out between AMTI of $112,500 and $282,500. Without the new law, the exemption would have dropped to only $33,750.
- $33,125 for those who use married filing separate status. The exemption is phased out between AMTI of $75,000 and $200,100. Without the new law, the exemption would have been only $22,500.
The law, signed by President Bush on December 19, 2007, also allows taxpayers to use various personal tax credits (such as the dependent care credit and the two college education credits) to reduce both their regular tax and AMT bills for 2007 only.
This fix will prevent many middle-income individuals from being forced into paying AMT for the 2007 tax year but lawmakers have not solved the AMT problem. They just put a temporary "patch" on it. |
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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