Beware the Complicated
And Costly AMT

By Kay Bell • Bankrate.com

Three letters, AMT, are striking tax fear in the hearts of more and more middle-class filers.

These folks are simply trying to use the tax code, legally, to lower their annual Internal Revenue Service bills. They claim exemptions for eligible dependents, deduct the interest on their mortgage and associated equity loan, and write off the state income taxes they pay. Some of these tax breaks, however, will do them no good under the alternative minimum tax system.

Commonly referred to as the AMT, this tax has its own set of rates (26 percent and 28 percent) and requires a separate computation that could substantially boost your tax bill. Basically, it's the difference between your regular tax bill, figured using ordinary income tax rates, and your AMT bill, figured by filling out more IRS paperwork. When there's a difference, you must pay that amount, the AMT, in addition to your regular tax.

The AMT was designed in 1969 to ensure that wealthy taxpayers didn't use loopholes to escape paying their fair share of taxes. The original target was 155 filers with the then-exorbitant income of $200,000 who avoided paying any federal taxes.

More AMT victims, higher taxes
On average, when an AMT payment is required, the federal coffers get around $2,000 more per tax-paying household.

Government number crunchers point to other alarming figures. Four million people paid AMT in 2005 and until Congress acted in late December, it looked like the AMT would ensnare around 23 million taxpayers when they file their 2007 returns. Thanks to the Dec. 26, 2007, law change, most of those folks are off the AMT hook this year.

The legislative fix, however, was only for a year. That means that federal lawmakers must keep making changes to the AMT or around 52 million taxpayers will face the parallel levy by 2015.

Why the increase? Because the tax is not indexed for inflation. Without that annual adjustment, your yearly raises of a few percentage points have been moving you closer or even into the income realm that the tax law deemed almost 40 years ago as prime AMT bait.

The IRS' own Taxpayer Advocate says the system should be scrapped; the President's Advisory Panel on Tax Reform agrees.

While lawmakers and economists wrangle every December over how to tweak the AMT, taxpayers are left to deal with it. Here's what to look for, as well as what to look out for, when it comes to this potential added tax burden.

Calculation insult to tax injury
Adding insult to injury, the AMT's parallel system demands that taxpayers do more work to pay more in taxes. The effort is required both in filing paperwork (the dense, two-page Form 6251, Alternative Minimum Tax -- Individuals) and maintenance of separate records for regular and alternative tax purposes.

Even filers who escape actual payment of the higher tax still must do additional work just to learn that they are off the AMT hook.

To help sort through the AMT mess, some taxpayers turn to computer software packages, most of which include AMT computation, or hire professional help. Both choices should help you stay on the IRS' good side, especially if you owe AMT, or at least put your mind at ease if you don't.

But the options also will add to the overall cost of calculating your tax bill.

Free help in figuring your AMT
For the last couple of years, the IRS has provided some free AMT calculation assistance.

Page 2