Municipal Money Fund Investors Getting Hit by Alternative Minimum Tax. Advisors and investors have been receiving interest tax form 1099's listing tax-exempt interest income. But these forms also list interest subject to the AMT, the nightmarish parallel tax system which taxes "private activity" bonds like stadiums backed by local governments. While Tax-Exempt and Tax-Free Money Funds may only invest up to 20% in AMT paper, Municipal Money Funds have no restrictions. For example, while the largest tax-exempt fund, Vanguard Tax Exempt Money Fund shows a 16.2% AMT holding (as of 2/28), the largest muni fund, Fidelity Municipal MMF shows a 68.5% AMT position (as of 2/28). Fidelity and Schwab have recently also launched "AMT Tax-Free" funds, which refuse to hold any amounts of the pesky paper.

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