By: George Bauernfeind
Every taxpayer with an investment portfolio of any size definitely needs to be concerned about the Alternative Minimum Tax. Certain types of investments, and the income earned on those investments, are likely to trigger the AMT. Most investors also have expenses associated with managing these portfolios, and certain of these expenses also can have an AMT impact.
It should be noted that only investments outside of qualified retirement plans – e.g., those investments not in a 401(k), an IRA or an employer’s retirement plan – are affected by the AMT, so it is these investments that are the focus of this article.
Investment income
Municipal bonds, in particular Private Activity Bonds
Interest earned on municipal bonds is exempt from the Regular Tax. For the Alternative Minimum Tax, however, certain municipal bonds – those labeled "private activity bonds"- are subject to tax. These types of bonds are used to support "private activities," an example of which would be a local government’s development of an industrial park as an inducement for companies to locate in the area.
The concern to the investor is the negative impact that being subject to the AMT has on the bond’s effective yield. For example, a municipal bond fund in today’s market may be yielding in excess of 4 percent, but if private activity bonds are a part of that fund’s portfolio, more than a quarter of the yield on this part can be lost due to the AMT. That 4 percent quickly drops to a net-after-tax 3 percent yield!
Partnership investments
For an individual investing in a partnership, after the close of the year a tax form known as a "K-1" will be received. Because the partnership is a pass-through entity for tax purposes, this form tells each partner what income or losses to report on his or her individual tax return.
On the Form K-1 there also is a box labeled "Alternative Minimum Tax (AMT) Items." If the partnership itself has any AMT items, they pass through and are reported by the individual partners just as the income or losses are. It is fairly common for investment partnerships to have activities that generate AMT items, so investors should consider inquiring about this when initially evaluating the investment. Here again, the anticipated yield can be reduced significantly if the AMT has to be paid.
Capital gains
Long-term capital gains are a bit of a sleeper issue with regard to the Alternative Minimum Tax. Although officially they are taxed at the same tax rate for purposes of the AMT as they are for the Regular Tax (currently 15 percent), and they are not a specifically-identified AMT item, nonetheless they can have a significant impact on an individual’s Alternative Minimum Tax. The reason for this is the fact that, as taxable income increases, the AMT exemption amount is gradually phased out. Since capital gains are included in taxable income, that 15 percent Regular Tax rate easily creeps closer to a 20 percent rate when figuring the AMT. This is especially important for those folks already in the phaseout income range ($150,000 to $440,000 for marrieds filing jointly; varies by filing status).
George Bauernfeind is with AMTIndividual.com, providing analysis, customized strategies, and an online dual tax calculator/planner to help you reduce your Alternative Minimum Tax. Visit http://amtindividual.com or http://amtblog.com for access to this tax software and to read more tax planning articles on the Alternative Minimum Tax.
Article Source:
http://www.articlebiz.com/article/1051441564-1-i-am-an-investor-does-the-amt-apply-to-me/
Every taxpayer with an investment portfolio of any size definitely needs to be concerned about the Alternative Minimum Tax. Certain types of investments, and the income earned on those investments, are likely to trigger the AMT. Most investors also have expenses associated with managing these portfolios, and certain of these expenses also can have an AMT impact.
It should be noted that only investments outside of qualified retirement plans – e.g., those investments not in a 401(k), an IRA or an employer’s retirement plan – are affected by the AMT, so it is these investments that are the focus of this article.
Investment income
Municipal bonds, in particular Private Activity Bonds
Interest earned on municipal bonds is exempt from the Regular Tax. For the Alternative Minimum Tax, however, certain municipal bonds – those labeled "private activity bonds"- are subject to tax. These types of bonds are used to support "private activities," an example of which would be a local government’s development of an industrial park as an inducement for companies to locate in the area.
The concern to the investor is the negative impact that being subject to the AMT has on the bond’s effective yield. For example, a municipal bond fund in today’s market may be yielding in excess of 4 percent, but if private activity bonds are a part of that fund’s portfolio, more than a quarter of the yield on this part can be lost due to the AMT. That 4 percent quickly drops to a net-after-tax 3 percent yield!
Partnership investments
For an individual investing in a partnership, after the close of the year a tax form known as a "K-1" will be received. Because the partnership is a pass-through entity for tax purposes, this form tells each partner what income or losses to report on his or her individual tax return.
On the Form K-1 there also is a box labeled "Alternative Minimum Tax (AMT) Items." If the partnership itself has any AMT items, they pass through and are reported by the individual partners just as the income or losses are. It is fairly common for investment partnerships to have activities that generate AMT items, so investors should consider inquiring about this when initially evaluating the investment. Here again, the anticipated yield can be reduced significantly if the AMT has to be paid.
Capital gains
Long-term capital gains are a bit of a sleeper issue with regard to the Alternative Minimum Tax. Although officially they are taxed at the same tax rate for purposes of the AMT as they are for the Regular Tax (currently 15 percent), and they are not a specifically-identified AMT item, nonetheless they can have a significant impact on an individual’s Alternative Minimum Tax. The reason for this is the fact that, as taxable income increases, the AMT exemption amount is gradually phased out. Since capital gains are included in taxable income, that 15 percent Regular Tax rate easily creeps closer to a 20 percent rate when figuring the AMT. This is especially important for those folks already in the phaseout income range ($150,000 to $440,000 for marrieds filing jointly; varies by filing status).
George Bauernfeind is with AMTIndividual.com, providing analysis, customized strategies, and an online dual tax calculator/planner to help you reduce your Alternative Minimum Tax. Visit http://amtindividual.com or http://amtblog.com for access to this tax software and to read more tax planning articles on the Alternative Minimum Tax.
Article Source:
http://www.articlebiz.com/article/1051441564-1-i-am-an-investor-does-the-amt-apply-to-me/
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