Municipal Bond Interest Can Be Taxable – Make Sure You Trust Your Broker Is Competent

05 Dec Municipal Bond Interest Can Be Taxable – Make Sure You Trust Your Broker Is Competent

I am so sick and tired of late night commercials selling snake oil. My latest angst comes from claims of tax free municipal bonds. Not all municipal bonds offer tax free interest so the next time slick Rick the broker harasses you to buy his latest municipal bond be sure to ask him if the proceeds of the bond issue are being used to finance a private activity also referred to as PRIVATE ACTIVITY MUNICIPAL BONDS.  The interest on these bonds although exempt from regular income tax is subject to ALTERNATIVE MINIMUM TAX. And statistically if you are considering a municipal bond as an investment it is probably because you are concerned about your income tax liability. And if you are concerned about your income tax liability you should also be watching closely your ALTERNATIVE MINIMUM TAX liability.

This is what wikipedia has to say about PRIVATE ACTIVITY BONDS:

In general, a private activity bond is a bond issued by or on behalf of local or state government for the purpose of financing the project of a private user.

Section 141(a) of the Internal Revenue Code provides that the term private activity bond means any bond issued as part of an issue which meets:

(1) the private business use test of section 141(b)(1) and the private security or payment test of section 141(b)(2), or

(2) the private loan financing test of § 141(c).

Under Treasury Regulation section 1.141-2, an interest on a private activity bond is not excludable from gross income under section 103(a) of the Internal Revenue Code unless the bond is a qualified bond. Interest from private activity bonds became subject to the Alternative Minimum Tax after theTax Reform Act of 1986. All things equal, yields on private activity bonds are higher due to this tax treatment.