Alternative minimum tax may not be so alternative

Practice Pointers. By Cathy B. Goldsticker, AMNews contributor. Sept. 26, 2005.

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Question: Each year my tax consultant offers explanations on why my tax bill is so high, and inevitably the discussion includes alternative minimum tax. I don't get stock options from my practice or any other outside sources, which I understand is a large player in the AMT calculations, so why do I owe this tax?

Answer: I don't blame you for being frustrated with your position of owing alternative minimum tax. The tax's claws are far-reaching to the point where many taxpayers who weren't intended to be assessed for the tax when the law was originally drafted are now finding themselves with a significant AMT bill.

AMT provisions were enacted in 1970, when there were extremely wealthy households that had paid no tax the prior year.

The Brookings Institution, a Washington-based think tank, noted in a report last year that 1 million households were affected by AMT in 1999. If the current law does not change, 33 million households will be affected by 2010 -- making AMT "as common as the mortgage interest deduction today." Brookings estimates that 93% of households earning between $100,000 and $500,000 would be hit with AMT.

Every taxpayer is allowed an exemption or deduction of $40,250 (single) or $58,000 (married) against AMT. As your income increases, the exemption amount is reduced or phased out.

And income doesn't just mean what you take home from work. Look at long-term capital gains. Although they receive the same low preferential income tax rate under the AMT calculation as they do regular tax, they also increase your income for purposes of assessing AMT. If you sell stock each year at significant capital gains, there is a good chance you will be liable for AMT.