After figuring your taxes the normal way, you start over, adding back to your income many of the things you were able to subtract on your regular return. These include such things as personal exemptions and the deduction for state and local taxes.
After figuring your AMT income, you take what amounts to a big standard deduction -- $58,000 for a couple this year, $40,250 for a single -- then apply special tax rates of 26 percent on the first $175,000 of taxable income and 28 percent income above that. You then compare your tax calculated the AMT way to your tax calculated the regular way, and pay whichever is higher.
There are lots of twists and turns to the AMT. The big standard deduction, known formally as the AMT exemption amount, was given a special boost for 2003 and 2004, but falls back to $45,000 for a couple and $33,750 for a single next year. Also, the exemption phases out for high-income taxpayers.
There are two main reasons for the AMT's expanding reach. First, it is not indexed for inflation, so the exemption has become less and less meaningful. Congress recognizes this problem, which is why the special two-year boost was adopted. Second, the recent cuts in regular tax rates have meant that when taxpayers compare their regular tax to their AMT tax, it's more likely they will find the AMT higher.
So why doesn't Congress fix this?
As the rappers say, it all comes down to the money.
At a time when federal deficits are at record levels, the AMT is raising huge amounts of money. The AMT is the government's ATM -- a cash machine.
In fact, the AMT brings in so much money that the Tax Policy Center study calculates that by 2009 it would be cheaper from the government's point of view to repeal the regular income tax than to repeal the AMT.
Further, the AMT's existence allows politicians to trumpet tax cuts without mentioning that a big chunk of those cuts will be "clawed back" just as taxpayers reach for them. The study figures that in 2010, the AMT will take back 29 percent of the 2001 and 2003 tax cuts.
"The claw back rises to 47 percent for households with cash income between $100,000 and $200,000, and 70 percent for those with income between $200,000 and $500,000," the study said. It added that about 3 percent of taxpayers would see all benefit of those tax cuts eliminated.
