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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

Content is the opinion of the author and does not represent the position of any other person or entity. Information is from sources believed to be reliable but cannot be guaranteed.

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Tax planning with municipal bonds

originally posted: 11/22/2006  reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If in doubt, please send a new question or ask for an update.

Q: I have been considering federal and state tax-exempt municipal bonds as a way to reduce taxes but am concerned that I might trigger an alternate minimum tax.

A: You caution is warranted. There is no way anyone can say "off the cuff" whether this strategy will work for you. Effective tax planning must start with a detailed review of your individual tax situation. A review looks at what taxes are actually being paid as well as the limits imposed by the Alternate Minimum Tax, state-specific limitations and other practical considerations. The process starts with a review of your last year's tax return then projects your financial changes and finally incorporates changes anticipated in tax laws anticipated over the next few years. Only after these three factors are considered can a meaningful opinion be formed about your tax planning strategy. A complete federal income tax review along with a written recommendation of strategies is available from the affiliated "OnlineAdviser" service for a flat fee of $300. This would be the best way to address your question. Tax-free bonds are a good solution for a relative few people, but most discover better tax-saving options through the review process. It is not that there is anything wrong with using municipal bonds, but rather that it is unlikely that this change will have much effect in your larger financial picture. After the individual tax analysis, the odds are that tax-free bonds probably would not make the "top five" list of tax-saving strategies so you may wish to also consider other approaches that will have a more dramatic effect. A little money spent for a few hours of professional help with tax planning usually produces the highest returns on investment as compared with any other type of financial planning.


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