The IRS Gives Help on AMTs and Takes Higher Fees to Solve Other Problems

The Internal Revenue Service had good news and bad news, and more bad news, for taxpayers recently.

The good news was that the agency set up a calculator at its Web site to help taxpayers figure out if they are subject to the alternative minimum tax, a special tax originally aimed at making sure the rich pay something but increasingly whacking the middle and upper-middle class instead.

The bad news is the IRS's tacit acknowledgment that the AMT is now so pervasive that millions of taxpayers need such a calculator just to figure out if they have to pay that tax.

And the additional bad news is that while the AMT calculator is free, the IRS is radically increasing its "user fees" for certain other kinds of assistance, notably for taxpayers who foul up a retirement-plan rollover, distribution or other provision. One fee is going from $625 to as much as $9,000, notes Long Island accountant and IRA expert Ed Slott.

User fees, of course, have been greatly in vogue in recent years as a way of increasing government revenues without formal tax increases, and the IRS has long had its share. But these increases, which were first announced last month but apparently went largely unnoticed until they were published in an IRS bulletin last week, are impressive.

The reason you need a calculator for the AMT is that it is all but impossible to eyeball your income and deduction figures and know whether you have to pay it or not.

The AMT is a parallel tax universe that is structured differently from the regular income tax. While the regular income tax has half a dozen brackets and the choice of a modest-size standard deduction or a horde of itemized deductions, the AMT has two brackets (26 and 28 percent), a large standard deduction called an "exemption amount" and a handful of itemized deductions that are allowed along with the standard one.

Taxpayers must do their tax the regular way, then redo it the AMT way, and pay whichever is higher. It's hard even to say at what point a taxpayer should start worrying about the AMT, but the 2005 exemption amount for a couple is $58,000, so folks who itemize and have taxable incomes over that amount should at least be aware of the tax.

Some key reasons that middle-class taxpayers can have to pay the AMT are that personal exemptions allowed under the regular tax are disallowed under the AMT, potentially hitting large families, and that you cannot deduct state and local tax payments in figuring the AMT, though you can deduct them on the regular tax if you itemize. This rule is particularly hard on residents of high-tax jurisdictions, such as the District.

And over the years, the AMT has not been adjusted for inflation, so its reach extends farther and farther down the income scale. (Ironically, with the addition of higher brackets since 1986, really rich taxpayers often are untouched by the AMT because their liability under the regular tax is higher.)

Most commercial tax-preparation software already automatically checks for AMT liability, and programs used by professional tax preparers do the same. But those who still do their tax returns on paper should find the IRS's program helpful.

To find the calculator, which the IRS calls "AMT Assistant," go to the agency's Web site, http://www.irs.gov , and do a search on "alternative minimum tax." That produces a list of hits, with (at least last week) "Alternative Minimum Tax (AMT) Assistant for Individuals" at the top. Click on that.