Municipal bonds and Alternative minimum tax

[Foodeefish]

What bonds or bond funds would you invest in if you were one of the lucky people to pay the Alternative Minimum Tax? My goal is to reduce my tax burden and balance my portfolio with some bonds.

All taxed defered options have been taken advantage of.

Thanks

 

[LOL!]

I would probably not invest in muni bonds. I would use my tax-deferred accounts for regular bonds and I would use my taxable accounts for investments that generated unrealized capital gains because unrealized capital gains are tax-free and AMT free. I would even make my tax-deferred accounts close to 100% fixed income if I need to for "balancing"

 

[danm]

Legislation has been introduced to repeal AMT in 2007. It seems to have a good chance of going through, as according to Wikipedia AMT is supported by Democrats as it hits middle class in Democratic regions, like California.

 

[Leonidas]

From reading some of your earlier posts, there are some points I’m not clear on. It appears that you’re going to work for 5 (or maybe 10?) more years at your present combined salaries of $250K, and then retire to another state with no debt and estimated annual living expenses of $60K. You’ll also have more than half a million in retirement accounts and about $400K in gains from the sale of your current house after you’ve paid for the new house. Plus, until you make the move in 5-10 years, you will be LBYMs and investing an additional $100K each year.

But, you won’t be really retired, because you’re both going to find jobs in order to get health benefits, and you think/estimate/hope to make $60K a year in those new jobs.

Are you both going to work at that estimated salary until you’re eligible for Medicare?

Are you planning on investing the entire $100K/year in munis?

The reason I ask is because, if I figured out your plan correctly, it sounds like you guys are not planning on withdrawing from your investments for another 13-20 years.

In which case I don’t see a reason to be making a big move into bonds at the moment. Certainly, I would not be putting the amount you’ve referenced in previous posts ($100K+/year for five-ten years) into bonds. Depending on your exact salaries after your move, you’ll be either in the 15 or the 25% tax bracket, and, the exemption amount for the AMT ought to exclude that nasty tax from applying to you. I don’t see tax exempt bonds being very attractive in that situation.

I agree with LOL’s post. Figure out your desired asset allocations and use your tax-deferred accounts to hold bonds. Delay taxable income, that you won’t need for quite some time anyway, by investing in something with capital gains potential and then sell as needed once you’re in the lower tax bracket.

 

[TargaDave]

I would probably not invest in muni bonds. I would use my tax-deferred accounts for regular bonds and I would use my taxable accounts for investments that generated unrealized capital gains because unrealized capital gains are tax-free and AMT free. I would even make my tax-deferred accounts close to 100% fixed income if I need to for "balancing"

So does that mean if you end up with bonds in a taxable account through inheritance that you would go through the effort of selling them and rebuying them in tax deferred accounts (along with the corresponding stock selling/buying between taxable and deferred to maintain allocations)?

 

[brewer12345]

Foodee, assuming you are set on bonds in a taxable account, I would look for a bond fund that is specifically labelled "AMT-Free" or similar, since there are funds out there specializing in AMT free stuff. Alternatively, you might look into buying individual bonds. If you are in a state with state income taxes, I would seriously consider buying your state's "general obligation" bonds (GO bonds). Credit risk would be nearly zilch and they would be AM T free.

 

[LOL!]

So does that mean if you end up with bonds in a taxable account through inheritance that you would go through the effort of selling them and rebuying them in tax deferred accounts (along with the corresponding stock selling/buying between taxable and deferred to maintain allocations)?

Yes. When my MIL passed away, the heirs basically made things simple by cashing out all the investments and dividing the proceeds. Since inherited assets get a stepped up basis, there was no particular tax consequences to selling and really no effort as well. Indeed, my spouse found it harder to try to transfer assets than to just sell them and get a check.

Furthermore, the asset allocation and investments of the deceased are unlikely to be the desired ones of the heirs. It is one of those behaviorial finance things that folks "hang on" to the investments of dear ol' dad rather than do what they need to do for themselves.

I would consider the taxes when rebalancing across taxable and tax-deferred assets, but inheriting assets is not particularly taxing.

 

[Foodeefish]

Thank you all for your thoughts and advice and especially Leonidis for looking at the previous posts.
Leonidis, you have the story straight and I thought that munis would allow me to invest, yet lower my tax implications. Because we both have 401K plans with pretty decent funds, I thought it would be best to invest in the Munis. We do have bond funds in our 401K plans, but have no money in them as of today because the other funds are doing quite well.

We currently have a gross income of $250-$260K annually and would like to move south and work making $60 annually in 3-5 years.
We have about $100K annually to invest which includes a $31K payout every January for the next ten years These annual payouts are due to a def ered compensation plan I had with a former company.

The tax man will eat these payouts alive plus the other monies I have to invest. I thought maybe half the monies in Munis and the rest in index funds.
Any advice would be great.

Thanks

Foodeefish

 

[Leonidas]

Thank you all for your thoughts and advice and especially Leonidis for looking at the previous posts.

You're welcome. The membership here has helped me with a different topics and I feel an obligation to try to contribute. Plus, it was it was a good learning exercise for me. I strongly recommend that you invest in your future by doing some independent reading on personal finance, taxation, investment, etc. I'm self educated on this stuff and thought I had it all figured out, but after spending time here I realized that I had gaps in my knowledge. Not everybody here agrees about the best way to do things, and not everything you read about here will apply to your situation, but there is a lot of information present that will get you to do some critical thinking and learning about the things you need to know.