Why are private activity bonds subject to AMT?

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AcadiFi · Accepted Answer

Private Activity Bonds (PABs) are municipal bonds where MORE THAN 10% of proceeds fund private business use AND more than 10% of debt service is secured by private payments — OR where more than 5% ($15M max) is used for private loans. Common PABs: IRBs for manufacturers, airports, student loan bonds, housing bonds, qualified 501(c)(3) bonds. Congress created the tax-exempt AMT add-back in 1986 to discourage excessive use of municipal tax exemption for private benefit. Interest on PABs is STILL exempt from regular federal income tax, but it's a PREFERENCE ITEM for Alternative Minimum Tax — added back on Form 6251. If you're in AMT, the effective tax rate on PAB interest is 26% or 28%. Exception: bonds issued in 2009-2010 under ARRA, and 2020 disaster-relief PABs, were exempted from AMT. Example: Priyanka Sharma earns $230K wages, plus $18,000 of tax-exempt interest — $12,000 from non-PAB bonds and $6,000 from an airport PAB. Regular tax: all $18,000 exempt. AMT calculation: $6,000 PAB interest added back to AMTI. If she's in AMT at 28%, PAB interest costs her $1,680 — making effective yield far less attractive than non-AMT munis. Ask your broker whether a bond is 'AMT' or 'non-AMT' before purchasing if you could be in AMT territory.

Why are private activity bonds subject to AMT?

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