Products & Their RisksQuestion 164 of 398
Interest from certain 'private activity' municipal bonds may be:
a.Subject to state tax only
b.Included as a preference item for the alternative minimum tax (AMT)
c.Always fully taxable at the federal level
d.Exempt from all taxes including capital gains
Explanation
Some municipal bonds finance private activities and, while their interest is generally exempt from regular federal income tax, that interest can be a preference item that must be added back when computing the alternative minimum tax (AMT). Investors subject to the AMT may therefore owe tax on this otherwise tax-exempt interest, which lowers the bond's after-tax appeal for them.
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