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Alternative Minimum Tax Impact from Investing Activities

Todays Date: November 18, 2018

Income that is earned from investments is a significant factor in the amount of Alternative Minimum Tax an individual pays. Certain types of investment income (dividends, capital gains, certain interest, e.g.) as well as the amount of this income in relation to the taxpayer’s other income, all factor into the AMT formula. A taxpayer usually has much more control over investment income than he does his salary, for example, making this source of income much more important from an Alternative Minimum Tax planning point of view. In general, an investment portfolio can be changed any time a taxpayer finds it advantageous to do so.

Discussed below are a few key items associated with investing activities, and the AMT planning opportunities that may exist.

Dividends and capital gains

Most dividends on common stocks are “qualifying,” and, thus, are eligible for a lower tax rate than “ordinary income,” which consists of things such as salaries and wages, interest income, rental income, and the like. Similarly, a capital gain that qualifies as a “long-term” capital gain also is eligible for this lower tax rate. As discussed in a recent article on amtblog.com, even though the tax rate on dividends and capital gains is the same for both the Regular Tax and the AMT, the effect on a taxpayer’s exemption amount can mean that these items of investment income are the reason a taxpayer is paying the AMT.

Planning strategy – use a model such as that available on AMTIndividual.com to determine the real tax rate being paid on dividends and capital gains. For maximum returns, investors should always consider after-tax yield when evaluating investment alternatives.

Tax-exempt bond interest

In general, municipal bond interest is exempt from Federal tax. However, certain muni bonds are designated “private activity” bonds, depending on how the proceeds of the bond issuance are used. Interest from private activity bonds continues to be exempt for the Regular Tax, but it is fully taxable for the AMT, with the result that the after-tax yield is significantly less than what the taxpayer originally thought he was earning. Note that, in order to boost yields, certain muni bond funds may allocate a portion of their portfolios to private activity bonds.

Planning strategy – Again, a taxpayer always should be considering after-tax yield in evaluating investments. An AMT payer generally should not be holding private activity bonds. If the investment is in mutual fund form, there are plenty of muni bond funds available that do not invest in private activity bonds.

Partnerships and other “pass-through” investments

In many cases partnerships themselves will have AMT items, but since a partnership “passes through” these items, it is the individual partner who ends up paying the AMT. For example, a real estate partnership may use a depreciation method that is allowable for the Regular Tax but is not allowable for the AMT. This difference in depreciation methods is an AMT item that will be reported to the partner on the Form K-1 he receives from the partnership, which, in turn, must be reported on the partner’s own AMT schedule, the Form 6251.

Note that this same pass-through treatment results in the case of S corporations, LLCs, and certain estates and trusts.

Planning strategy – Before investing in a partnership, an individual should inquire about AMT items that the partnership may generate. Once invested, it generally is too late to do anything about them.


While the old maxim that taxes should not determine an investment strategy is true, nevertheless an investor who is stuck in the AMT may be earning a significantly lower after-tax yield on his investments than he realizes. Remember that it is only after-tax income that an investor actually gets to keep; ignoring taxes, especially the AMT, is unwise.

George Bauernfeind is with AMTIndividual, providing analysis, customized strategies, and an online dual tax calculator / planner to help you reduce your Alternative Minimum Tax. Visit www.amtindividual.com or www.amtblog.com to read more tax planning articles or to access this tax software on the Alternative Minimum Tax.

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