Alternative Minimum Tax (AMT) Part 1 - What is it and Could it Affect How Much You Pay in Taxes?

Are you affected by the alternative minimum tax? Or worried you might be? You have reason to be concerned. Few of the government's changes to the tax system have had a more adverse effect or have caused as much anger and frustration as the alternative minimum tax (AMT). But you don't have to be at its mercy. Read on for a few action steps you can take to reduce your chances of getting caught in the AMT net.

The original intent that led to the AMT was likely well-meaning, if probably misguided. Many legislators felt that some people simply weren't contributing sufficiently to the government's coffers.

The idea was that there were too many tax loopholes that allowed the "rich" to avoid paying their fair share of taxes. Let's not get into a debate about the wisdom of that general idea right now, but instead take a look at what actually happened to the original intent.

Once the AMT was instituted, it has been not just the "rich" who have fallen within the reach of the AMT, but increasingly the middle class as well. In fact, more than 4 millio
U.S. taxpayers are affected today, and by 2010, more than a third of all taxpayers in the country will be caught up in the net of AMT.

You can find yourself in the grip of the AMT with as little as $75,000 a year of income. That's not rich by any stretch of the imagination. What happened was that the one special AMT exemption hasn't kept up with inflation, so more and more people end up having to deal with the AMT every year.

Here's what this means in terms of the numbers: Taxpayers who fall within the scope of the AMT, have to pay the highest tax rate on all of their income, or close it it, instead of the normal progressive tax rate that gets to the 28 percent level only for the portion of their income that exceeds $82,250 (for single filers) or $137,050 (for joint filers) in 2009.

Among the deductions the AMT takes away are those for state and local taxes, employee business expenses, as well as portions of the foreign tax credit. The latter creates a double tax for the 10 millio
Americans living abroad.

It's even worse for businesses and entrepreneurs. It takes a lot more planning to determine whether to sell an asset -- or the business. Just the paperwork to determine whether or not one is subject to the AMT requires going through nine pages of instructions. And then you'd have to fill in a 16 line worksheet and a 55 line form (in 2009).

Still, while doing the math can be a hassle, there's a fairly easy way to figure out whether or not you'd have to pay the AMT. Start out with the number for your basic taxable income under the regular system, and then add the amounts you'd normally be able to deduct. From the resulting number, deduct the applicable AMT exemption. Check the tax rate schedules to figure out how much you'd owe if you had to pay the AMT.

If those calculations result in an amount that is greater than the taxes you'd otherwise have to pay under the non-AMT system, you have to pay the AMT. For most people this means that they're paying substantially more taxes than they would owe under the "regular" system.

It makes you wonder if you could avoid getting caught up in the AMT. As it turns out, there are a few things you can do to either avoid the AMT or at least modify its bite considerably. All of them involve planning and paperwork, but considering how much money and aggravation they can save you, they're worth it.