Investors can rest assured that the alternative minimum tax does not affect their municipal bond holdings.

• The interest paid on municipal bonds is often exempt from federal taxes, making them an attractive investment option.
• Some private-activity bonds are taxed under the alternative minimum tax calculation.
• Some municipal bond funds are explicitly "AMT-free," indicating that their investments won't produce income subject to the Alternative Minimum Tax.
• The number of people subject to that taxation has significantly decreased due to tax-law changes in effect through 2025.

Many investors may have opted for "AMT-free" municipal bond funds recently.

These days? Maybe not so much.

Since the federal tax overhaul in 2018, only a small share of taxpayers are subject to the alternative minimum tax (AMT), which means that investing in such a fund may not provide an additional tax benefit, experts suggest.

T. Rowe Price's thought leadership director, Roger Young, stated that from a financial-planning perspective, people should not be overly concerned about their bond fund being 'AMT-free.'

Young stated that while there is nothing inherently wrong with an AMT-free fund, most individuals should not have to concern themselves with it.

Individuals with high incomes may be required to pay the AMT, which is essentially a tax that operates under a different tax structure than the regular income tax. The AMT calculates tax liability by disallowing certain deductions and including some income not taxed under normal rules, and individuals must pay the higher of the two amounts.

In 2018, the number of taxpayers subject to the AMT decreased from 5 million in 2017 to approximately 150,000, due to changes in the Tax Cuts and Jobs Act.

In 2022, the AMT exemption amount for single filers is $75,900 and $118,100 for married couples filing jointly. However, these exemptions begin to phase out at $539,000 for single filers and $1,079,800 for joint filers.

The attraction of muni bonds for investors lies in the fact that the interest earned is typically exempt from both federal and state taxes, where the bond is issued.

Most private-activity muni bonds, which are not used solely for government functions, do not fall under the AMT.

For most investors, other funds could provide exposure to private-activity bonds, while a muni bond fund that excludes those holdings may be suitable only for those still subject to the AMT.

Young stated that the fund's avoidance of AMT income limits the range of possible investments.

Most funds' income is largely tax-free, even if you were to get surprised by the AMT.

According to Beth Foos, associate director of fixed-income strategies at Morningstar, bonds subject to the AMT are not typically a significant portion of a portfolio's holdings, even for funds that can invest in them.

And, most muni bonds would qualify as AMT-free anyway, Foos said.

In general, the majority of the market, she stated.

Historically, municipal bonds subject to the Alternative Minimum Tax (AMT) typically provided higher yields than those not subject to it. However, the difference in yields may have decreased since the tax changes were implemented.

Be mindful that while your municipal bond income is not taxed, it is taken into account when calculating how much of your Social Security income is taxed and whether you will pay higher Medicare premiums.

The Tax Cuts and Jobs Act's AMT changes will expire at the end of 2025, along with other provisions that reduced individual tax burdens.

If Congress fails to act, approximately 7 million taxpayers will be subject to the AMT in 2018, according to estimates from the Tax Policy Center. In 2017, the AMT exemption was $54,300 for single filers and $84,500 for married filing jointly, and the exemption was phased out when AMT taxable income exceeded $120,700 for singles and $160,900 for joint filers.

"Ignoring the fact that the law is set to expire is not advisable, as it would depend on one's individual circumstances whether to hold onto the funds or not," Young stated.