All municipal bond income is not created equal. Income from private activity bonds is subject to the alternative minimum tax.
Private activity bonds account for approximately 7 percent of the bonds issued last year. The most common issuers are airports and single family housing projects. The difference between private activity and a general obligation bond is that the private activity bond has corporate rather than government backing.
The alternative minimum tax was intended from its inception in 1969 to make the very rich pay some taxes. However, this has not been subject to inflation adjustments and inflation has caused this tax to snare more and more people every year. Recent income tax cuts have lowered what people must pay, consequently the alternative minimum tax has become even more prevalent. People with much smaller incomes than this tax was originally targeted for are now paying more in income taxes.
According to studies, millions of taxpayers will be subject to AMT in 2006. Among those with …show more content…
This is a multi-state fund and is completely exempt from federal income taxes.
The second fund has an 8.95 percent exposure to AMT bonds and has a monthly dividend of $.076 per share ($14.82 market price).
Computing your tax liability:
.076 x 8.95 percent x 28 percent = .002
.074 x 12 / 14.82 = 5.99 percent current yield (after paying federal AMT taxes at 28 percent)
In our example, the investor is ahead over 1 percent by allowing a minimal investment in AMT bonds and paying minimal additional taxes!
Historically, AMT municipal bonds have offered yields of .25 percent to .75 percent higher than the “completely tax-free bonds.” Before you make the mistake of eliminating AMT bonds from your portfolio examine the after-tax yield provided by adding minor taxable income to your portfolio. You may find that you are actually ahead of the game by paying a minor amount of
Private activity bonds account for approximately 7 percent of the bonds issued last year. The most common issuers are airports and single family housing projects. The difference between private activity and a general obligation bond is that the private activity bond has corporate rather than government backing.
The alternative minimum tax was intended from its inception in 1969 to make the very rich pay some taxes. However, this has not been subject to inflation adjustments and inflation has caused this tax to snare more and more people every year. Recent income tax cuts have lowered what people must pay, consequently the alternative minimum tax has become even more prevalent. People with much smaller incomes than this tax was originally targeted for are now paying more in income taxes.
According to studies, millions of taxpayers will be subject to AMT in 2006. Among those with …show more content…
This is a multi-state fund and is completely exempt from federal income taxes.
The second fund has an 8.95 percent exposure to AMT bonds and has a monthly dividend of $.076 per share ($14.82 market price).
Computing your tax liability:
.076 x 8.95 percent x 28 percent = .002
.074 x 12 / 14.82 = 5.99 percent current yield (after paying federal AMT taxes at 28 percent)
In our example, the investor is ahead over 1 percent by allowing a minimal investment in AMT bonds and paying minimal additional taxes!
Historically, AMT municipal bonds have offered yields of .25 percent to .75 percent higher than the “completely tax-free bonds.” Before you make the mistake of eliminating AMT bonds from your portfolio examine the after-tax yield provided by adding minor taxable income to your portfolio. You may find that you are actually ahead of the game by paying a minor amount of