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AMT and tax exposure
Q
I thought bonds subject to the AMT could open one up to taxes, which is why they have a slightly better rate. Is that the risk one takes with the AMT?
A
James A. Klotz responds:
Yes, you are correct. If you are an AMT taxpayer and purchased bonds subject to AMT, you would be required to pay a tax on the income.
Since the lowest Alternative Minimum Tax (AMT) rate is 26%, it is absolutely prohibitive for an AMT taxpayer to own municipal bonds that are subject to AMT.
AMT bonds do hold a yield advantage over non-AMT bonds. This yield difference would depend on the coupon rate and the maturity date of the bonds. We recommend you consult your accountant or tax preparer to determine if you are subject to the AMT.
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