Increasingly, Americans are running into the alternative minimum tax (AMT),
which can cause legitimate tax deductions to go to waste, raising your tax
bill. According to the Treasury Department, the AMT currently applies to 3
million Americans, most of whom have incomes over $200,000. By 2010, though, it
will spread to 30 million tax returns, including many where income is less than
$100,000.
The AMT is an income tax that’s calculated in a different manner than the
regular income tax. Each year, taxpayers calculate their tax obligation both
ways and pay whichever tax bill turns out to be higher, the AMT or the regular
tax.
- If Diane Johnson owes $40,000 on her AMT and $50,000 on her regular tax,
she pays her regular income tax.
- If Ed Peters owes $60,000 on his regular tax and $70,000 on his AMT, he
pays the AMT. The IRS always wins in this game.
In high-tax areas such as New York and California, state and local sales or
income tax and property tax alone can push you into the AMT. If you live in
such an area, meet with your tax preparer to see if it’s possible to avoid or
minimize the AMT.
