Private Activity Bond

Generally, interest from municipal bonds issued by a state or local government is federally tax-exempt for both regular and alternative minimum tax (AMT) purposes. However, some municipal bonds whose proceeds are used to support private businesses are classified as private activity bonds and the interest from them – whether paid directly to the bondholder or through a mutual fund – is taxable for AMT purposes. Taxpayers subject to the AMT may wish to utilize alternate investment vehicles.