The alternative minimum tax (AMT) may become a major issue for investors. Back in 1987, only 140,000 personal tax returns were subject to the AMT. In 2000 that number was around 1.3 million and is predicted to reach 13 million by 2005, due in part to the 2001 tax law, which does not address the AMT in a meaningful way. Here’s what you need to do:
- Check with your tax preparer to see if you’ll be subject to the AMT for 2002; if not, is such exposure likely in the next few years?
- If you think you’ll soon have an AMT exposure, evaluate your municipal bond holdings. The disclosure documents will state whether or not a particular issue generates interest subject to the AMT. Sell your AMT debt and buy AMT-free issues.
- Check your mutual fund holdings, too. Many funds load up on AMT issues to boost yields while others are prohibited from doing so. If a fund has 20% of its assets in AMT debt, for example, 20% of its income distributions will be subject to the AMT. Again, make any necessary substitutions.
