Taxpayers caught in the expanding net of the alternative minimum tax, or AMT, will probably have to tinker with their portfolios as they figure out how much more money they owe the government.

Investors accustomed to deducting many of the expenses and some of the interest from their investment activity can't lower their tax liability the same way under the alternative minimum tax rules. Additionally, some bond funds bought for their tax benefits may wind up costing AMT payers more money.

Accountants and financial planners grappling with their growing numbers of AMT-paying clients say the system dings investors in three principal respects.

1. Certain types of municipal bonds are not free of federal taxes. While general obligation municipal bonds are safe from the tax man -- and worth a look if their lower yields wind up providing a better overall return -- bonds that are used for so-called private activity, or a specific purpose, such as building a sports stadium or developing an industrial area, are not exempt under AMT.

2. Investment interest -- what you pay to borrow stocks on margin -- will go into figuring your tax bill under AMT.

3. The tax deduction allowed under the primary tax structure for investment advisory services -- often overlooked at tax time, planners say -- won't be forgotten under AMT because it's not deductible.

The distinction between private activity bonds and general obligation bonds requires investors who own municipal bonds or related funds to look over their portfolios, and could force some sales, says Michael Kitces, a financial planner in Columbia, Md.

"The unpleasant surprise you can face is that instead of getting a higher taxable bond yield, you may have taken a lower municipal bond yield, and it turns out to be taxable anyway," he says. "But you'd already taken the lower yield because you thought it would offer you a better total return."

And it's become enough of an issue to draw distinctions among funds.

Neither Fidelity's

Spartan Tax Free Bond

fund

(FTABX) - Get Report

nor the

Thornburg Limited Term Municipal Bond

fund

(LTMFX) - Get Report

have AMT-liable bonds in their portfolios. The T. Rowe Price

Tax Free Income

fund

(PRTAX) - Get Report

limits its AMT-liable holdings to 5% of the portfolio.

Ann Jevne, an accountant and financial planner in Norwalk, Conn., says she's had to help several clients new to the AMT trap with their portfolios, and it has complicated their strategies.

"An investment decision should be based on a good investment opportunity, but you have to take taxes into consideration for the overall picture," she says. "When they might have been on the line

to pay the AMT, this might just kick them over. We're discussing it more and more with our clients when we discuss their taxes."