How to Beat the Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) is trapping more taxpayers than ever. Created to ensure that the wealthiest taxpayers pay some income tax regardless of the tax breaks they use, the AMT now ensnares many middle class taxpayers.

A taxpayer first computes regular taxable income, then adds back a number of tax breaks. After subtracting an exempt amount, the two AMT tax-rate schedule is applied. You pay the higher of the regular income tax and the AMT. Taxpayers in states with high state and local taxes or who have high personal and dependent exemptions are especially at risk to the AMT. Also at risk are older taxpayers.

There are ways to plan around the AMT, and we have covered them in past visits. The strategies are in the Tax Watch section of the web site Archive. The problem for many taxpayers is that they have no idea they might face the AMT until their tax returns are completed – when it is too late to act.

Congress recently provided some relief to taxpayers who might have faced the AMT for the first time in 2006. (See the article on page 3.) But many taxpayers still must deal with the AMT.

To help estimate the risk of facing the AMT, the IRS has provided the AMT Assistant on its web site. It essentially is an automated version of the worksheet that is in the instructions for Form 1040 and should take five to 10 minutes to complete.

To use the AMT Assistant, go to the IRS web site at www.irs.gov. In the search box, enter “AMT Assistant.” The first link on the next page should take you to the instructions for the AMT Assistant. The information entered is anonymous and for personal use only. The IRS says it does not share, store, or use it, and the information cannot be used to identify the individual entering it.