Q: What is the Alternative Minimum Tax? How do I evaluate my exposure to AMT? How do municipals affect AMT?
A: The Alternative Minimum Tax is an added tax structure put in place some years ago to make sure that even those who took advantage of large deductions and exotic tax shelters paid income tax. It has received much publicity lately, because the amounts subject to it have not been adjusted for inflation. As a result, many taxpayers now considered middle income have found themselves subject to it.
It is nearly impossible to explain concisely how to evaluate AMT exposure. The instructions to Form 1040 contain a helpful worksheet which will give you an idea if you have exposure. And if completing the worksheet indicates you have exposure, you should complete Form 6251 to actually compute the amount.
Interest received from "private activity" municipal bonds, while exempt from regular income tax, is taxable for AMT purposes. Private activity bonds are those that municipalities issue to provide funds to entice businesses to locate there by using bond proceeds to buy and construct the business property, then repay them from rental proceeds paid by the business. If you won municipal bond mutual funds, the funds will tell you how much tax-free interest is subject to AMT.
These questions are actual inquiries submitted by taxpayers to our AARP Tax-Aide Program. The AARP Tax-Aide Program is a volunteer-run, free tax-preparation and assistance program offered to low- and middle-income taxpayers with special attention to those age 60 and older. Our volunteers are trained and IRS-certified to understand individual federal-tax issues. Our volunteers provide tax assistance as a public service and cannot guarantee the accuracy of the information provided.