There is a ray of hope for tax-free bond investors who are afraid of becoming subject to the Alternative Minimum Tax (AMT). Municipal bond investors paying taxes by the AMT method are taxed on income derived from “private activity” bonds, which is 100% federally tax-free for investors who compute their taxes using the conventional method.
Three separate bills introduced in Congress in the past few weeks address this problem.
One bill would specifically exempt private activity bond interest from the AMT calculation for individual taxpayers, while the other two would eliminate the AMT entirely.
The legislation introduced by Richard Neal (D-Mass.), would fully exempt private activity bond interest from the AMT calculation. Mr. Neal has expressed concerns regarding the potential impact of the AMT on low- and moderate-income housing. He fears individual investors, who make up the majority of municipal bond buyers, will abandon this market as the AMT begins to effect an increasing number of taxpayers.
Neal said that a number of mutual funds have already stated their intention to avoid bonds subject to AMT, which he says will drive up the interest rates on these bonds, thereby increasing the cost of financing projects.
A bill introduced by Bill Shuster (R-P.A.), calls for indexing the AMT exemption for inflation and eliminating the tax in 2010.
Proposed legislation by Amo Houghton (R-New York), would raise the exemption for individuals starting January 1, 2006, and would repeal the AMT in 2014.
We will update the progress of this legislation as more information becomes available.