A Tax That Sneaks Up on You

When the subject of the once obscure alternative minimum tax comes up, millions of people are finding there's no alternative to what has become an increasingly common unpleasant experience.

About 3 million Americans are now subject to the alternative minimum tax, but that number could increase to 15 million, largely because of President Bush's package of tax cuts. That's right, tax cuts.

While middle-class taxpayers would face higher bills and increased aggravation, Congress now faces a problem that looks increasingly costly, both economically and politically. Repealing the AMT could cost the government $700 billion over the next 10 years, but doing nothing could strip away the benefits of recent tax cuts, boosting voters' bills and sending them to the polls in an angry mood.

The alternative minimum tax is a simple idea surrounded by a slew of complications. It uses a different formula to calculate your tax bill, and it is imposed if your regular tax bill would be lower than the tally under AMT. (For those who are liable to get caught in its net, you actually have to calculate your taxes twice.) It's a strange transformation for a measure passed 35 years ago to keep a handful of very rich people (with incomes over $200,000) from dodging tax payments by stripping out a slew of tax exemptions.

Regular taxes have a range of income brackets, from 10% to 35%, and figuring out tax liability generally involves compiling a list of allowable exemptions and deductions, such as interest on a mortgage, child tax credits, the interest on home equity loans and the cost of state and local taxes.

The AMT has a basic exemption and fewer allowable deductions, working almost like a flat tax at rates of 26% and 28%, and it is not indexed for inflation, explains Michael Kitces, a financial planner in Columbia, Md. But that is largely unknown to most taxpayers until it hits them for the first time, and by then it is often a costly lesson.

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