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Converting AMT bonds

Q

Over the years, I’ve used the usual formulas of taking my federal tax bracket and the smaller correction for the state tax bracket in calculating the effective yield of a taxable interest investment and comparing the result with a non-taxable yield. In the past couple of years I’ve been subject to the Alternative Minimum Tax (AMT) and it appears that the effective interest earnings on bonds subject to AMT becomes significantly lower. Should these bonds be sold and replaced with non-AMTs or does the cost of selling and buying replacement non-AMT bonds result in a “wash”? This probably needs to consider the maturity of the AMT’s but I would appreciate your thoughts.

E.S., New Jersey

A

James A. Klotz responds:

Since the lowest AMT rate is 26%, it is absolutely prohibitive for an AMT taxpayer to own municipal bonds that are subject to AMT.

$100,000 in AMT bonds paying 5% or $5,000.00 annually would net $3,700 per year after paying the AMT.

Converting AMT bonds to non-AMT securities would cost an investor between 25-40 basis points (your 5% yield might be reduced to 4.6% or 4.75%). This is a far less onerous price to pay.

Apr 11, 2005

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