Alternative minimum tax closing in on middle class

Not making millions? All the more reason to worry!

The alternative minimum tax, enacted nearly 40 years ago to ensure that wealthy taxpayers pay at least some federal income tax, is working its way down the income-bracket chain. Unless Congress makes fundamental changes, by 2010 the AMT will hit half of those earning between $75,000 and $100,000, and some earning even less will also be affected.

• Alternative minimum? Think mandatory and maximum. In theory, everyone who files a return is obligated to figure out whether he or she owes the tax. You do this by calculating your taxes twice, first by using the regular tax code and then by using the AMT, which has its own set of rates and rules and allows fewer deductions. If your AMT liability exceeds your regular tax bill, you have to pay the AMT.

• Tax cuts don't count. The tax cuts of 2001 and 2003 doubled your odds of being snared. That's because, unlike the regular tax code, the AMT has never been indexed for inflation, so more middle-class taxpayers owe the AMT each year. If the current tax cuts (which are scheduled to expire in 2010) are extended, 53 million filers — or nearly half of all taxpayers — will pay the AMT in 2017.

• You'll need an accountant. The Internal Revenue Service claims that you can figure out whether you owe the AMT in "five to 10 minutes" by using its AMT Assistant (apps.irs.gov/app/amt). But let's be honest — it's a complicated, time-consuming process. Perhaps that's why an estimated 75 percent of AMT payers hire a professional.

• There's no escape from AMT hell. Although there are extraordinary events that could push you into the AMT, such as exercising incentive stock options or even winning a lawsuit, the two biggest triggers are paying a lot in state and local taxes and having a large family. And short of moving to a state with no income tax (Texas, anyone?) or putting your kids up for adoption, there's nothing you can do about it.

• And it's not going away. To shield middle-income taxpayers from the AMT, Congress has provided only Band-Aid relief over the years — a patch here, a patch there. Why no real reform or longer-term relief? Blame it on the numbers, says Chris Edwards, tax-policy studies director at the Cato Institute. "If you extend AMT relief for one year, the five- and 10-year budget impact looks smaller than if you were to extend relief permanently." Indeed, getting rid of the AMT altogether may cost more than $1 trillion over the next decade.