Municipal Bonds are known to be tax advanaged vehicles for investing money, but that tax advantage sometimes does not extend to individuals subject to the Alternative Minimum Tax (AMT).
Municipal Bonds are known to be tax advanaged vehicles for investing money, but that tax advantage sometimes does not extend to individuals subject to the Alternative Minimum Tax (AMT).
The AMT was originally created to prevent millionairres from using deductions and other accounting tricks to avoid paying income taxes. It does this by in essence, creating a seperate tax code with its own rules and less generous deductions. When the AMT was first created in the 1970s, it only applied to a few thousand indivuals with high incomes but because it is not indexed to inflation, it now applies to millions of people.
"Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As an increasing number of taxpayers incur the AMT, pressures to reduce or eliminate the tax are likely to grow."
How this Impacts Municipal Bonds
Amongst the many items that can no longer be deducated in the AMT include interest on private activity municipal bonds. These bonds arevtypically municipal bonds that are issued to fund private projects like sports stadiums and hospitals as opposed to public projectsl like schools, roadwork, sewer systems, etc.
While it's easier to recognize and spot a private activity munis when purchasing individual bonds, this becomes much harder when purchasing a municipal bonds mutual fund or a muni etf where many different bonds are packaged together.
In response to this, many financial companies have created AMT free funds and ETFs. They generally pay a lower rate but remove any chance of the revenue qualifying as income under the AMT.
If you are unsure about your AMT status or the AMY status of a certain fund or ETF, be sure to consult your tax or investment advisor.
CNBBankDirect recently re-launched their website to make it a great resource for all types of financial advice. The bank also is offering a free savings account that pays 1.20% APY.
CNBBankDirect, a division of Citizens National Bank, has been previously featured on BestCashCow.com, but the bank recently redesigned and re-launched their website to make it easier than ever to obtain not only information on the bank's products, but also general financial news and articles for the everyday consumer. This is a refreshing change from many bank sites that only seem interested in promoting their own products. The Savings News section of CNBBankDirect’s website includes articles on things such as identity theft, retirement health care costs, and how to use Twitter to solve credit card problems with your bank. The bank's About Us section also includes links to other financial websites, including BestCashCow.com, to promote well-rounded, educated consumers.
Additionally, the bank is currently offering a high yield savings account that pays 1.20% APY. There are no monthly service fees, you need only $1 to open an account, and you earn interest on all balances $1 and more. You must open your account online, and you can link any non-CNBBankDirect checking or savings account and transfer money back and forth between them. Since CD rates have been so low recently, this bank account gives you a great way to easily earn a higher interest rate on your money but with instant penalty-free liquidity if needed.
The Zions Bank Internet Savings Account is currently offering a 1.11% APY, yet it also has over 125 physical branches you could visit if need be.
Recently, I discussed how many online-only banks, such as Bank of Internet, are able to offer better interest rates than many brick-and-mortar banks because they are able to keep their overhead costs low. But what if you just don't feel comfortable using an online-only bank? Even if people conduct most of their business via ATMs, the telephone, and online, some people just feel more comfortable knowing that there's a physical location they can go to if they have a problem, even if they never need to actually visit it. There's absolutely nothing wrong with that. However, do you always have to forfeit that higher interest rate for the security of knowing there's a brick-and-mortar location out there?
Zions Bank may have found a solution to that dilemma. Zions has over 125 brick-and-mortar branches in the Intermountain West, it's headquartered in Salt Lake City, Utah and it's been in business since 1873. Zions is currently offering an Internet Savings Account at 1.11% APY, which is competitive with some of the best online accounts offered. You get the benefit of an Internet-only rate, but the peace of mind offered by knowing the bank has many brick-and-mortar locations. In order to get this rate, account balances must be $1,000 or more, and you'll need a minimum opening deposit of $100 or more. Interest is compounded daily and paid monthly, and there are no monthly maintenance fees. You can make unlimited withdrawals via ATM, by mail or in person; however, since this is an Internet savings account, you would be charged $3 per withdrawal if you make the withdrawal in person. Of course, you don't need to live anywhere near a branch to open this Internet account, but it would come in handy if you ever plan to visit a branch.
