The Alternative Minimum Tax
The Tax Policy Center defines the Alternative Minimum Tax as the following:
The individual alternative minimum tax (AMT) operates alongside the regular income tax. It requires many taxpayers to calculate their liability twice—once under the rules for the regular income tax and once under the AMT rules—and then pay the higher amount. Originally intended to prevent perceived abuses by a handful of the very rich, it now affects almost 5 million filers.
Participants in the municipal bond market have long been familiar with the AMT as it is often applied to private activity bonds. When a private company accesses the municipal bond market to finance a new project, typically, the interest earned on those bonds is subject to the alternative minimum tax, if the holder of such bonds is considered to be under the AMT umbrella.
One of the most common places you will see AMT bonds are issues from airline companies. The airlines are granted access to the municipal bond markets, in most cases, to develop their specific gates at local airports across the country. See an example here of bonds issues for Delta Airlines through the Massachusetts Transportation Authority.
If bond holders are unaware that they qualify, the alternative minimum tax can eat into their total return. If you hold any private activity bonds in your bond portfolio contact your tax professional to be sure you are not subject to the AMT and thus lowering your rate of return.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.
All bonds and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Supporting documentation for any claims or statistical information is available upon request.
Municipals and tax-exempt bonds are not necessarily a suitable investment for all persons. Information related to a security’s tax-exempt status (federal and in-state) is obtained from third-parties and Las Olas Wealth Management of Nat Alliance Securities LLC does not guarantee its accuracy. Tax-exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.
Dean Myerow is a municipal bond market asset manager and along with partner, Sean Vesey the team structures institutional and high net worth investor portfolios at Las Olas Wealth Management of NatAlliance Securities LLC.