The Biggest Tax Misconception About Muni Bonds

September 8, 2014

by Michelle Perry Higgins

A common misunderstanding about municipal bonds is the belief that all of them are exempt from federal taxes.

Municipal-bond income from a “private activity” municipal bond may be subject to the alternative minimum tax, or AMT. The AMT is a tax that is calculated separately from the regular income tax. The AMT calculation eliminates or limits deductions and exclusions otherwise available under the regular income tax. Originally, the AMT was created to ensure that very high income taxpayers would have some tax liability but gradually more and more taxpayers have become subject to the AMT. Therefore, prior to purchasing, do your due diligence by checking whether the bond is an AMT bond or a non-AMT bond by reviewing the bond issue’s official statement or checking with your financial adviser.