The alternative minimum tax (AMT) started as an “add on” tax, created in 1969 after Congress heard testimony about 155 wealthy American who had paid no income taxes. Nearly 50 years later, Congress was once again focused on the AMT, this time as part of the negotiations related to the Tax Cuts and Jobs Act.

On the campaign trail, Donald J. Trump promised to repeal the individual AMT, which millions of Americans often found themselves paying. How did a tax designed for fewer than 200 people end up applying to millions? It turns out that an investor’s AMT exposure can be elevated by certain investments in stocks, bonds, and mutual funds. AMT also tends to affect taxpayers with many dependents, high state and local taxes, second mortgages, large credits or deductions, incentive stock options, long-term capital gains, or interest on qualified private-activity bonds. As many taxpayers have learned, an individual’s AMT exposure can be hard to predict.

Of course, it’s also hard to predict which campaign-trail promises will be kept. When the tax legislation passed in mid-December 2017, the corporate AMT had been repealed, but the individual AMT remained intact, albeit with some increased exemption and phase-out levels.

Investors who have paid AMT in the past – as well as those who worry that they may have to pay it in the future and those who simply don’t like guessing about taxes when they invest – may wish to consider one of the two Oppenheimer Rochester municipal bond funds that won’t increase their AMT exposure. (Please note that a portion of some distributions may be taxable; capital gains distributions are taxable as capital gains.)

Each of these funds strives to generate attractive total returns derived primarily from tax-free income:

Read some competitors’ prospectuses carefully, and you’ll discover several funds that are merely “close to AMT free,” with as much as 20% of assets in the private-activity bonds that can increase an investor’s AMT exposure.

In contrast – and to the benefit of investors subject to AMT – the Oppenheimer Municipal Fund Management Team focuses on building AMT-free portfolios that exclude private-activity bonds.

The net investment income from our two AMT-free funds is typically exempt from federal personal income taxes and will not increase a taxpayer’s AMT exposure. Income from our AMT-free fund for New Yorkers is also exempt from state and local income taxes, where applicable.

Key details about Oppenheimer Rochester AMT-Free Municipal Fund

  • Troy Willis is the lead portfolio manager.
  • He is supported, as needed, by other members of the Oppenheimer Municipal Fund Management Team.
  • The fund may invest in the securities of any U.S. state or U.S. territory. (Territory bonds are typically exempt from federal, state, and local income taxes.) Additionally, the fund will include a diversity of holdings through its investments in different sectors and in bonds with different structures, credit qualities, and maturities. For example, the fund may hold inverse floaters.1
  • The fund may invest up to 25% of its total assets in below-investment-grade securities, or “junk” bonds; the percentage of assets is measured at the time of purchase as is the credit quality of the securities.
  • The fund may hold non-rated bonds, which are securities that have not been rated by a nationally recognized statistical rating organization (NRSRO), such as S&P Global (S&P).Over the years, the Oppenheimer Municipal Fund Management Team has enhanced yield by investing with unrated but creditworthy issuers, many of whom intentionally forgo the time and expense of obtaining a published rating.

Key details about Oppenheimer Rochester AMT-Free New York Municipal Fund

  • Michael Camarella is the lead portfolio manager.
  • He is supported, as needed, by other members of the Oppenheimer Municipal Fund Management Team.
  • The fund may invest in the securities issued in New York State and those issued by any U.S. territory. (Territory bonds are typically exempt from federal, state, and local income taxes.) The fund’s significant holdings in the bonds of New York municipalities can make the fund vulnerable to geographic risk, which is the risk related to economic, regulatory or political developments in a given region.
  • Additionally, the fund will include a diversity of holdings through its investments in different sectors and in bonds with different structures, credit qualities, and maturities. For example, the fund may hold inverse floaters.
  • The fund may invest up to 25% of its total assets in below-investment-grade securities, or “junk” bonds; the percentage of assets is measured at the time of purchase as is the credit quality of the securities.
  • The fund may hold non-rated bonds, which are securities that have not been rated by an NRSRO, such as S&P.As noted earlier, the Oppenheimer Municipal Fund Management Team has enhanced yield over the years by investing with unrated but creditworthy issuers, many of whom intentionally forgo the time and expense of obtaining a published rating.

Each of these AMT-free portfolios typical includes a diverse mix of bonds including high-quality small issues and premium-coupon, callable bonds.

High-quality small issues typically reward bondholders with attractive yields and payment schedules. While these bonds may trade less frequently than larger issues, a diverse set of holdings generally offers a fund sufficient liquidity to help achieve its objectives.

Premium-coupon callable bonds generally provide favorable yields. As these bonds approach their call dates, they tend to have less exposure to interest rate moves and less price volatility than other tax-free investments. Because issuers can be highly inefficient about exercising their call options, we have often collected above-market yields long beyond a bond’s call date. In these instances, the market’s inefficiencies can reduce call risk (when an investor receives less income than had been expected) as well as reinvestment risk (when the market fails to offer equally attractive investment opportunities). Historically, premium-coupon, callable bonds have been a positive for fund shareholders.

As portfolio managers, we work hand in hand with the credit research analysts on the Oppenheimer Municipal Fund Management Team. Our collaboration and our approach to active fund management, we believe, have been the key factor in our historic ability to maintain competitive distribution rates.

Like our other funds, the Oppenheimer Rochester AMT-free funds employ a security-specific, value-oriented and research-intensive approach that helps us identify many attractive but overlooked bonds. We call this yield-driven approach to creating shareholder value the Rochester Way.

While a degree of uncertainty remains about the future of the AMT, investors are well advised that there’s often a difference between what lawmakers and politicians say and what they can enact.

Follow @OppFunds and @RochesterFunds for more news and commentary.

 
  1. ^Inverse floaters are tax-exempt securities whose interest payments move inversely to changes in short-term interest rates. Inverse floaters often exhibit greater price volatility than fixed-rate bonds of comparable maturity and credit quality.