Question

Louise Lawson, one of your high net worth clients, calls you and tells you her friend mentioned something about having to pay a special tax called AMT. When reviewing her extensive portfolio with her, you would explain that the only securities she is holding that could lead to an AMT issue are the?

1) 100,000 of Atlanta Airport Revenue bonds due 1/2030
2) 100,000 of City of Decatur School District bonds due 7/2031
3) 100,000 of GEMCO cumulative preferred shares
4) 100,000 of KAPCO debentures due 8/2029

Answer 1

In regards to AMT concerns, the City of Decatur School District bonds could be subject to the Alternative Minimum Tax if they are considered private activity bonds, unlike the corporate securities held by the client which are taxable under regular and AMT tax systems.

Step-by-step explanation:

When reviewing the extensive portfolio of Louise Lawson, a high net worth client, in regard to potential Alternative Minimum Tax (AMT) issues, the only securities she is holding that could lead to an AMT concern are the 100,000 of City of Decatur School District bonds due 7/2031. While municipal bonds are often tax-exempt at the federal and state levels under regular income tax rules, some municipal bonds, specifically private activity bonds, can generate interest that is subject to the AMT.

Atlanta Airport Revenue bonds may be seen as a type of private activity bond if they are not 100% used for governmental purposes. The remaining two securities, GEMCO cumulative preferred shares and KAPCO debentures due 8/2029, are corporate securities and do not directly relate to AMT consequences because corporate bond interest is generally taxable under both regular income tax and the AMT.