General Securities Representative (Series 7) Practice Exam

Which type of bonds are most likely to be subject to Alternative Minimum Tax (AMT)?

1. General obligation bonds

2. Sales tax revenue bonds

3. Housing related revenue bonds

4. State general fund bonds

The correct answer is: Housing related revenue bonds

Housing-related revenue bonds are the type of bonds most likely to be subject to the Alternative Minimum Tax (AMT). These bonds are often issued to finance affordable housing projects and may have tax-exempt interest income for federal taxes. However, the interest on certain housing-related revenue bonds can be an item of adjustment for calculating AMT. Under IRS guidelines, some municipal bonds, particularly those that have a private purpose, can trigger AMT implications. Housing-related revenue bonds tend to be more closely associated with activities that might involve private business use or other private benefits, which may lead their interest income to be subject to adjustments under AMT rules. In contrast, general obligation bonds, sales tax revenue bonds, and state general fund bonds typically do not have the same issues with private benefit, making them less likely to be subject to AMT. General obligation bonds are backed by the taxing power of municipalities, sales tax revenue bonds are secured by sales tax revenues, and state general fund bonds are generally supported by the overall revenues of the state. Therefore, they are not typically designed in a way that would invoke AMT considerations.