IRS Wins, You Lose

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.