Tax Exempt Munis and AMT

My favorite answer: It Depends!

First, to the extent muni bond interest is included in calculations for regualr income, it is also figured for AMTI. So the amount of social security benefits that are taxable includes all muni interest in its calculation.

But to be more specific, all muni bond interest from Private Activity Bonds is added to AMTI and included in AMT calculations.

The Form 1099-INT now lists all muni bond interest and also the portion that is also private activity bond interest.

1) There are different kinds of munis. Some are tax exempt, and some are not. Public munis (school,water,roads) are tax exempt while private munis (whatever they are) are not.

2) Tax exempt munis (public) aren't included in ordinary income, and also aren't included in AMT calculations.

3) All muni interest IS included in determining SS taxability.

This is how I thought it worked, but I needed to hear it from an expert.

If I am wrong in my understanding, please let me know.

Thanks again,

AndyS

All municipal bond intrest is tax exempt for ordinary income purposes.

However, other items are affected by muni bond interest, such as taxability of social security, earned income credit calculations, and the Medicare Part B Surcharge amount.

Some municipal bonds are private activity bonds, and while the interest is tax exempt for ordinary income tax, that interest is taxable income for AMT.

Private munis would be things like hospitals, zoos. I wonder if malls and condos qualify too because sometimes the city takes land away by eminent domain and gives it to developers to build malls and condos, and the intent is a public purpose, specifically to bring jobs and bring revenue (which the Supreme court upheld in Kelo v. City of New London).

But it gets more complicated. The Recovery Act of 2009.

Right for federal. However, if you're a a resident of CA, then muni bond interest from NY (that would be tax free in NY and federal) is still taxable in CA.

Alternative Minimum Tax

The alternative minimum tax (AMT) is a minimum tax imposed on individuals and corporations at certain income levels who, after applicable deductions and credits, have too little tax liability in relation to its AMT income. AMT income is calculated by adjusting a taxpayer's taxable income for certain items that the Code considers "items of tax preference." Prior to the Recovery Act, (1) interest on all tax-exempt private activity bonds (other than qualified 501(c)(3) bonds and certain housing bonds) was considered an item of tax preference and (2) a portion of the interest earned on tax-exempt obligations was includable in the alternative minimum taxable income of corporations.

Under the Recovery Act, for bonds issued between December 31, 2008 and January 1, 2011:

1. The interest on tax-exempt private activity bonds is not an item of tax preference.
2. The interest on any tax-exempt bonds is not included in adjusted gross earnings in determining the alternative minimum taxable income of corporations.

In addition, any tax-exempt private activity bonds issued between

2004-2008 may be refunded in 2009 or 2010 and such refunding bonds will not be a preference as described above.

They also have build America bonds, recovery zone bonds, etc.