AMT Hits In the Middle

By Albert B. Crenshaw
Washington Post Staff Writer
Sunday, February 26, 2006

If the purveyors of tax-preparation software for home computers had been asked to design a law that would maximize their sales, they could hardly have come up with a better idea than the alternative minimum tax.

Anyone who might have to pay the AMT -- and for a wide range of taxpayers, it's all but impossible to know beforehand -- basically has to do his or her tax return twice .

Computers are good for this. They can instantly take the original numbers, crank them through a second set of computations, and determine whether you have to pay it.

For pencil-and-paper taxpayers, it's another matter, requiring them to slog through a second return, removing various deductions, adding some income items, inserting a special "exemption amount" and figuring their tax based on two special brackets.

Purveyors of irony must also enjoy the AMT. Cooked up back in the 1960s to try to make sure the wealthy couldn't parlay loopholes to escape taxes entirely, the tax was enacted in more or less its present form in the 1980s. Other than some tax-rate increases and some minor adjustments, it has been left largely alone, allowing inflation slowly but steadily to increase its reach.

Today, because of inflation and other factors, the tax is almost as likely to fall upon the merely well-to-do as upon the truly wealthy. And because of the way it is structured, large families with big mortgages in high-tax jurisdictions -- blue states -- are likely victims.

"One of the things we see with our clients is that more and more of our middle-class [ones] are being hit with the AMT," said Eric Fig of the Bethesda office of BDO Seidman LLP, a big accounting firm.

To understand why -- and to get a clue about whether you may be an AMT payer for 2005 -- take a look at how the tax works. You'll notice that it approaches a modern-day flat tax.

First, you calculate your AMT income. That's your regular income plus certain "preference" items including oil and gas benefits, interest on tax-exempt bonds, and some accelerated depreciation. If you exercised incentive stock options and held onto the stock, you may have to report more income.

You also make a number of "adjustments" by throwing out various exemptions and deductions if you took them. Deductions you lose include those for state and local taxes and interest on home equity loans or refinancings of home-purchase loans when cash is taken out. If you took the standard deduction instead of itemizing, you lose that. And you lose personal exemptions for yourself and your family.

Then you subtract the AMT exemption amount, which for 2005 is $58,000 for a married couple, and $40,250 for single taxpayers and heads of households. The exemption amount is a sort of standard deduction for the AMT. The larger it is, the smaller the number of AMT payers.

To what is left, you apply tax rates of 26 percent on amounts up to $175,000 and 28 percent on any amount more than that. That's your AMT, and if it is more than your regular tax, you pay that. If not, never mind, you pay your regular tax.

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