If AMTI / RTI > 150%, which action should be taken?

• A. Shift from taxable to tax-exempt bonds; RTI increases at a faster rate than AMTI
• B. Shift from tax-exempt to taxable bonds; RTI increases at a faster rate than AMTI
• C. Shift from tax-exempt to taxable bonds; AMTI increases at a faster rate than RTI
• D. Shift from taxable to tax-exempt bonds; AMTI increases at a faster rate than RTI

Answer: (B)

When evaluating AMTI versus RTI, remember that under the alternative minimum tax, certain tax-exempt interest can be treated as a preference item that inflates AMTI but does not affect RTI in the same way. If the ratio AMTI/RTI is above 150%, the goal is to reduce that ratio by increasing RTI relative to AMTI.

Shifting from tax-exempt bonds to taxable bonds accomplishes this because the interest that used to be tax-exempt (and counted as a preference item to raise AMTI) becomes taxable and is added to RTI instead. That causes RTI to rise by the amount of that interest, while AMTI does not gain that same amount from the tax-exempt interest. As a result, RTI increases faster than AMTI, driving the AMTI/RTI ratio down and reducing AMT exposure.

Conversely, moving from taxable to tax-exempt bonds would push that interest into AMTI via the preference item, raising AMTI more quickly and not helping the ratio above the 150% threshold.