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Q

I have recently inherited a large portfolio of municipal (mostly Texas) bonds and I have some questions, though they may seem elementary to you. Will the current administration change the federal tax structure so that it might affect the AMT? If so, how? Also, what book would you suggest I read in order to understand municipal bonds more completely? I am a retired secondary teacher (science and mathematics) and my current financial understanding is weak.

A

James A. Klotz responds:

Over the past few years there has been a great deal of Congressional lip service paid to repealing the Alternative Minimum Tax (AMT) in the context of overall tax reform. However, it is estimated that repeal of the AMT would leave a $1.35 trillion hole in the federal budget over the next 10 years.

Finding the revenue to fill this gap has been a daunting task and politically unfeasible. Today, with the country running the largest deficit in its history, AMT reform is virtually off the table.

Unfortunately, it seems inevitable that income taxes will be rising. The Bush tax cuts will expire at the end of this year, returning the maximum tax bracket to 39.6% from the current 35%.

For a better understanding of municipal bond investing, we would recommend “The Fundamentals of Municipal Bonds, 5th Edition” written by Judy Wesalo Temel for the Bond Market Association.