7662 / Is tax-exempt interest treated as an item of tax preference for purposes of the alternative minimum tax?

The answer is generally no. However, except as noted below with respect to private activity bonds issued in 2009 and 2010, tax-exempt interest on private activity bonds other than qualified 501(c)(3) bonds is a tax preference item for both the individual and corporate alternative minimum tax (prior to 2018, the corporate AMT was repealed for tax years beginning after 2017, see Q 777). The interest may be reduced by any deduction not allowable in computing regular tax that would have been allowable if the interest were includable in gross income (e.g., amortizable bond premium).¹ The preference item includes exempt-interest dividends paid by a mutual fund to the extent attributable to such interest.²

The alternative minimum tax applies to such bonds issued after August 7, 1986 (or on or after September 1, 1986, in the case of bonds covered by the “Joint Statement on Effective Dates of March 14, 1986”). Interest on bonds issued to refund immediately pre-August 8, 1986, bonds is not an item of tax preference.³

Temporary modification of AMT limits on tax-exempt bonds issued in 2009 and 2010. The American Recovery and Reinvestment Act of 2009 (ARRA 2009) provided a temporary tax break for private activity bond interest. For private interest activity bonds issued during 2009 and 2010, interest from such bonds was not treated as a tax preference item for alternative minimum tax purposes.⁴

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1.   IRC § 57(a)(5)(A).

2.   IRC § 57(a)(5)(B).