The alternative minimum tax (AMT) is now a burden for some high-income but this tax may soon affect 20 percent of all taxpayers, unless Congress acts. The AMT doesn’t just hit people with lots of tax shelters; its main victims are those with hefty deductions for state and local taxes and the $3,200-per-child exemption.
Today, the AMT primarily is paid taxpayers with incomes between $100,000 and $500,000 who live in high-tax states such as California, Connecticut, Maryland, Massachusetts, New Jersey and New York.
Moreover, the AMT is especially painful for large families. As things stand now, nearly all taxpaying families with three or more kids will be paying the higher AMT in a few years.
How can you cope with the AMT threat? If you invest in tax-exempt bonds, stick with municipal bonds and funds that do not include private activity bonds subject to the AMT. Municipal bonds and funds that avoid private activity bonds are the only truly tax-free holdings for investors subject to the AMT.
