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Time for Alternative Minimum Tactics

By Albert B. Crenshaw
The Washington post
Sunday, December 5, 2004; Page F01

With just four weeks left in 2004, now's the time for any last-minute tax planning you want to do.

Last calls of this sort have taken on a new dimension recently because a growing number of taxpayers, even fairly ordinary, middle-income ones, are being caught up in the maw of the alternative minimum tax. And while it's difficult to escape the AMT, there may be a few things you can do.

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By now, most people have at least heard of the AMT, but those who still think of it as what it was intended to be -- a special tax to make sure rich people pay at least something to the government -- are badly out of date.

Because of the AMT's structure, and Congress's unwillingness to change it, the tax's impact has been creeping steadily down the income scale. Lawmakers did extend a very modest relief provision this fall, but nonetheless millions of Americans will have to pay the tax this year, and many more will be forced to do calculations to see whether they have to pay it.

Upper-middle-income taxpayers and an increasing number of middle-income ones who live in high-tax jurisdictions such as the District and/or who have large families or certain kinds of deductions are likely to be caught up in it.

"The AMT has morphed into a stealth tax that traps taxpayers of more modest means," said Laurie Asch, senior tax analyst with RIA, a firm that provides information and software to tax professionals.

Essentially the AMT works this way:

First you do your taxes the regular way, and see what your tax is.

Then you do the AMT. That involves taking your regular taxable income, adding back in certain deductions that are not allowed under the AMT, and then applying a large "exemption amount" -- really a sort of standard deduction -- to find your AMT taxable income.

Then you apply special AMT tax rates -- 26 percent up to $175,000 and 28 percent above that -- and see what you owe. You then compare that to your regular tax and pay whichever is higher.

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