Alternative Minimum Tax

The Alternative Minimum Tax (AMT), also known as the "stealth" tax, is sneaking up and catching more American taxpayers by surprise. Congress created the tax with the intention of ensuring even the wealthy pay taxes.

• Back then, tax codes were a jungle of complex deductions supporting extremely high marginal tax brackets. Wealthy taxpayers could use various tax shelters, credits and deductions to avoid income taxes. Because the tax is not indexed for inflation, the amount of taxable income to be "wealthy" in the eyes of the tax collector is falling every year.
  
  In 1986 the tax code was overhauled and most of the tax dodges used by the wealthy were eliminated. Because Congress did not want to give up the revenue stream created by AMT, they counted certain deductions such as personal and dependent exemptions and medical expenses as preference items making them subject to the AMT.
  
  AMT will be a growing problem for middle-class taxpayers who are slowly being pushed into it. The total allowable exemptions for a married couple have been fixed at $4,500 per year ($3,375 for singles) since 1993. These exemptions are phased out when AMT income exceeds various limits. Over the next ten years, it is estimated that AMT will affect 11.6 million taxpayers and will grow most quickly among taxpayers with adjusted gross incomes of $30,000 to $75,000 a year.
  
  Calculation of AMT takes place after your regular income tax is figured. The AMT rate of 26% (incomes $0-175,000) or 28% (incomes above $175,000) is applied to your regular taxable income, after subtracting certain deductions, adding back tax preference items, and adjustments, and eliminating or reducing most tax credits. Any AMT due is paid in addition to your regular tax.
  
  Taxpayers have been accustomed to using certain tax deductions to reduce their taxable income. The size of these deductions has increased with their income and through legislation that Congress intended to counter-balance bracket creep. A few more common deductions not allowed in the computations for AMT include

Added back to income are certain tax preference items. Those fortunate enough to have been granted Incentive Stock Options (ISOs) who exercise their options and hold the stock for one year prior to selling, find a tax preference amount added to their tax returns. The preference is the difference between the current market price of the option stock and the option price. The good news is that any AMT taxes paid as a result of these transactions flows back as a tax credit against the capital gains when the stock is sold.

Bunching certain deductions such as prepaying large amount of property or state income taxes can catch the unwary. If you think you might be subject to the AMT, try calculating your regular taxes and the AMT. If you don’t like what you see, consider deferring property tax or State income taxes into the following year to avoid losing those deductions to the "Stealth" tax.