AMT and CA Tax exempt Bonds

[desihometown]

Hi,

I have had to pay AMT for the last 2 years. I invested in CA tax exempt bond funds. This would mean I dont have to pay Fed or CA taxes on Bond returns/dividends in return for a lower dividend as compared to those that
are taxed.

But if I hit AMT this year, that would mean I'll have to pay taxes(AMT)
on the bond returns, which would make my overall/post tax returns even lower.

My question is, would I better of investing in regular/non-tax exempt bonds
which I know will be taxed, but atleast I can get a higher return/dividends.


Thanks in advance for your inputs.
DHT

[harishk]

But if I hit AMT this year, that would mean I'll have to pay taxes(AMT)
on the bond returns, which would make my overall/post tax returns even lower.
[/quote]

Can you pay AMT taxes only on the bond returns? Don't you have to pay taxes on your entire income, if you are subject to the AMT?

Further, you have to pay the larger of AMT and regular income tax. Is there a scenario when AMT lowers your tax?

[Desi]

Hi,

I have had to pay AMT for the last 2 years. I invested in CA tax exempt bond funds. This would mean I dont have to pay Fed or CA taxes on Bond returns/dividends in return for a lower dividend as compared to those that
are taxed.

But if I hit AMT this year, that would mean I'll have to pay taxes(AMT)
on the bond returns, which would make my overall/post tax returns even lower.

My question is, would I better of investing in regular/non-tax exempt bonds
which I know will be taxed, but atleast I can get a higher return/dividends.


Thanks in advance for your inputs.
DHT[/quote]

My question is, would I better of investing in regular/non-tax exempt bonds
which I know will be taxed, but atleast I can get a higher return/dividends.

Yes, if it is bonds that you want to invest into.

[sigma]

#1,
Beginning 2006, 1099-INT reports the tax-exempt interest and how much of it came from private activity bonds. If you are subject to AMT, only this portion of it is taxed. Based on the last year data, Vanguard CA Tax Exempt Fund had about 15-20% of the interest coming from private activity bonds and you need to factor just that portion for the taxation.
Fidelity has a CA Tax-Exempt-AMT free fund which has similar returns compared to the regular tax-exempt fund. That may be a good alternative for you.

sigma

[desihometown]

THanks.