Comments on: Impact of AMT on tax exempt funds

By: indexfundfan

indexfundfan — Wed, 31 Oct 2007 05:07:07 +0000

Bimmer,
I presume you agree with the (1-0.28) term for the no AMT case. This term is because of itemizing the state tax on the federal tax return.

However for someone who is required to pay AMT, this deduction is disallowed. Basically you need to add back the state tax deduction in Pub 6251. So we end up with the term (1 – 0.325 – 0.093) in the AMT case.

By: Bimmer

Bimmer — Wed, 31 Oct 2007 04:32:08 +0000

Indexfan,
In the example #1 above, why is the factor (1-0.28) used only in the non-AMT example? Is state tax calculated differently if you are subject to AMT? Thanks for your help.
-Bimmer

1) For a fully taxable fund, e.g. VG Prime MMF yields 5.10%
Net yield (no AMT) = 5.10% * (1 – 0.28 – 0.093*(1-0.28)) = 3.33%
Net yield (with AMT) = 5.10% * (1 – 0.325 – 0.093) = 2.97%