Series 7 practice questionhardTax Implications — AMT
A client in the 35% federal tax bracket holds $200,000 in private activity municipal bonds yielding 4%. If the AMT rate is 28%, what is the client's potential AMT liability on this bond interest?
- A$0
- B$2,240✓ Correct answer
- C$2,800
- D$8,000
Explanation
Why B — $2,240
Annual interest = $200,000 x 4% = $8,000. This interest is a tax preference item for AMT. The AMT on this interest = $8,000 x 28% AMT rate = $2,240. Under the regular tax system, this interest would be exempt, but under AMT it is taxed. The actual AMT liability depends on the taxpayer's total AMT calculation, but the potential AMT on this specific item is $2,240.
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