Understanding the Alternative Minimum Tax

The alternative minimum tax (AMT) was created as part of the Tax Reform Act of 1969. The idea was to impose some tax on a small number of high-income taxpayers who were able to claim so many deductions that they otherwise ended up owing little or no income tax.

But because the AMT wasn't indexed for inflation, today, many middle-class taxpayers also are being hit with the AMT.

The AMT is an additional tax calculated by using rules that disallow several common deductions, such as those for state income tax or for a second mortgage.

You may be subject to AMT because of one big entry on your tax return, or as the result of a combination of many small factors. A few triggers that increase your odds of having to pay AMT include:

* Living in a high-tax state
* Having a lot of personal exemptions
* Claiming big miscellaneous deductions
* Exercising incentive stock options (ISOs)

How can you turn the numbers in your favor when you have to pay AMT? Here are some ways:

* Try to time state, local, and property taxes to be paid in years when you won't face the AMT.
* Try to time payment for medical expenses for a non-AMT year. Or take advantage of a pretax medical cafeteria plan if your employer offers one.
* Time your capital gains.
* Use tax-planning software or consult a tax pro before exercising stock options.
* Make a large cash contribution to your favorite charity.
* Accelerate income through such things as prepayment of job earnings and retirement account withdrawals.

Talk to a tax adviser for AMT details. It's important to choose someone who really understands this complex area.

For more information, visit irs.gov and search for:
*Tax Topic 556--Alternative Minimum Tax
*Form 6251, Alternative Minimum Tax
*1040 Central--Forms, publications, calculators, and other information for the filing season
*AMT Assistant

Another resource is the AMT Advisor Web site at http://www.amtadvisor.com/AMTtest.html.