alternative minimum tax (AMT)

alternative minimum tax (AMT)

A federal tax on taxable income as adjusted for specific tax-preference items, such as passive losses from tax shelters and interest paid on certain municipal bonds. The intent of the tax is to ensure that nearly all individuals pay at least some tax on their incomes. The alternative minimum tax is most likely to apply to individuals with high incomes when a relatively large portion of their income is sheltered from taxation under normal reporting. Also called minimum tax. See also private activity bond.

Case Study Municipal debt issues sometimes contain both AMT and non-AMT bonds. This combination is especially prevalent when public housing authorities issue debt securities. In April 2000 the Georgia Housing and Finance Authority issued $40 million of single-family mortgage bonds with maturities that ranged from June 1, 2001, to December 1, 2031. The AAA-rated issue included approximately $38 million of bonds that paid interest subject to the federal alternative minimum tax. The remainder of the bonds were of the non-AMT variety. AMT bonds are less desirable to own than non-AMT bonds because of the potential tax liability resulting from interest payments received. Because interest on AMT bonds is considered a preference item in calculating the alternative minimum tax, AMT bonds tend to have higher yields compared to non-AMT bonds from the same issue. In the case of the Georgia Housing and Finance Authority issue, AMT bonds maturing on June 1, 2011, provided buyers with a yield of 5.55%, while non-AMT bonds from the same issue maturing on the same date offered a yield of 5.25%. AMT and non-AMT bonds maturing on other dates offered a similar yield difference. The 30-basis point yield advantage of the AMT bonds was a bonus for investors who did not have to worry about paying the alternative minimum tax.