Retirement & Financial Planning Report

Here other warnings about the Alternative Minimum Tax*: If you’re in the habit of prepaying state and local income taxes in December, to accelerate the write-off, rather than waiting until January, when they’re due. Even though your estimated tax obligation is $5,000, your tax advisor might tell you to pay only $3,000 in December. That $3,000 payment is projected to reduce your regular tax bill for 2000 but paying the additional $2,000 would throw you into the AMT and effectively waste the prepayment.


You need to be careful when investing in municipal bonds, as well. The interest paid by some bonds is taxable, not tax-exempt, for individuals subject to the AMT. So read the disclosure documents carefully before buying munis and check with your tax pro if AMT exposure is indicated. The same is true if you’re investing in a municipal bond fund, many of which hold some AMT bonds. If 40% of a fund’s portfolio consists of AMT bonds–which might be the case with some “high yield” muni funds–then 40% of the income dividends paid by the fund will be taxable, for those subject to the AMT.


The alternative minimum tax (AMT), which was meant to sting the rich, now affects taxpayers with incomes as low as $75,000. It’s a parallel tax system that presents taxpayers with a “lose-lose” dilemma. Under the AMT, some tax deductions and tax credits are added back to your regular taxable income. Thus, you have a greater amount of “AMT income,” which is then taxed at a 26% or a 28% rate.