Why Do You End Up Paying the AMT?

The Alternative Minimum Tax is a parallel tax system that is an integral part of our Federal income tax system. It expands the amount of income that is taxed by adding items that otherwise are tax-free under the regular tax, and by disallowing many deductions.

Although the Alternative Minimum Tax originally was designed to apply only to the ultra-rich, today many more taxpayers, including those in the middle class, are paying it.

According to some recent estimates, by next year over 40 percent of all tax filers making between $75,000 and $100,000 could be paying the AMT. The AMT is more likely to be paid by taxpayers with large families, who are married, or who live in high-tax states. Residents of high-tax states such as New York, California, New Jersey and a few others represent almost the half of the total AMT dollars paid.

The amount of AMT you pay is in part related to the size of the family you have. This is because personal exemptions for taxpayers, their spouses, their children and any other dependents are not deductible for the AMT. It even has been noted that families with four or more children will fall into the AMT at income levels insufficient to qualify for a mortgage in certain parts of California!

Taxpayers with adjusted gross income (AGI) between $200,000 and $500,000 are in the category most affected by the AMT. Thus, if you make less than $200,000, and have a small family, your AMT calculation likely was less than your regular tax calculation. If you make more than $500,000, your regular tax likely is more than your AMT calculation, so you are less at risk for paying the AMT.

Thus, you might generalize and state that the Alternative Minimum Tax more commonly applies to urban professionals with a family, who own a house and live in a state with high taxes. People like successful venture capitalists and Hollywood stars who make millions usually don't have to worry about the AMT.

Although there are a number of ways to lessen your AMT, it is very difficult to avoid it completely. As soon as you pass $150,000 in annual income, every extra dollar you earn easily can increase your AMT liability relative to your regular tax.

The Alternative Minimum Tax is a tremendous burden. Although there have been many proposals in Congress to lessen this burden, no one has yet been able to come up with a long-term solution. Your choice is simply to pay up, or invest a little time and energy pursuing the ways that exist to lessen it.

AMTIndividual.com gives you customized strategies to soften the blow of AMT and easy-to-use planning tools for making tax-savvy decisions to reduce your AMT throughout the year.

George Bauernfeind is with AMT Individual - providing information on Alternative Minimum Tax Planning . He writes articles to help the tax payers to pay less Alternative Minimum Tax. He recommend to use Alternative Minimum Tax Calculator to reduce Alternative Minimum Tax.