The end of alternative-tax curbs could send investors running for shelter. The U.S. Alternative Minimum Tax (AMT) may hit every third taxpayer within a few years, yet most are ignorant of its existence. And if it does reach start reaching a broader swath of private investors, one asset manager sees them adjusting their portfolios to take in certain kinds of municipal bonds.

The AMT is a separate tax computation under the U.S. tax code that eliminates many deductions and credits and creates a tax liability for those who might otherwise pay little or no tax. For now, law exempts the first $42,500 of income earned by an individual and $62,550 claimed on a joint return.

Stealth

But this exemption expires at the end of this year. So, unless Congress does something about it, 19.2 million additional taxpayers will lose all or part of their deductions for mortgage interest and local property taxes and lose all or part of the lower 15% tax rates on stock dividends and capital gains that Congress enacted a few years ago -- and see their tax bills go up by an average of $2,390 a year.

"The AMT has earned a reputation as a stealth tax by capturing more people every year, many of whom don't even realize it until they prepare their taxes," says Robert MacIntosh, Eaton Vance's chief economist and co-director of municipal investments. "As year-end approaches, people should consult their tax advisor about the timing of income and deductions to help minimize their chances of becoming subject to the AMT."

As things stand, only one of every fourth taxpayer is familiar with the strictures of the AMT, according to a survey by Boston-based Eaton Vance, an asset-management company. By 2010, however, nearly half of all households with income between $75,000 and $100,000 will have to pay this tax.

For that reason, Eaton Vance sees investors turning to AMT-exempt investments such as certain municipal bonds. In fact, says MacIntosh, the trend may already be in evidence.

"In 2004, nearly 4.4 million U.S. tax returns listed tax-exempt interest," says MacIntosh. "This suggests there is already a wide audience for whom AMT-free municipal bond products should hold appeal."

Eaton Vance had about $124 billion in assets under management as of 30 September  2006. -FWR

.