Stealth Tax Spoils the Tax-Cut Party

AMT. It stands for alternative minimum tax, but for a growing number of people those letters mean America's misery tax.

The alternative minimum tax system was created back in 1969 so that a handful of rich people would stop wiping out their tax bill with credits and deductions.

But now, as a result of that oh-so-sly decision by Congress, 3.8 million people will be hit with the AMT in 2005, according to the U.S. Treasury Department, and not one of them will be rich. The main reason for that is that the AMT is not and has never been adjusted for inflation.

So you won't find Carlos Beltran or J. Lo dealing with this issue at tax time.

But your neighbor next door, who's making $150,000, has four kids and pays plenty of property taxes, has the AMT hanging over his head.

And the problem is getting worse. Sure, recent tax cuts lowered the rates and provided limited and temporary AMT relief. But the AMT system itself has not been adjusted in years. So as the regular income tax rates get lower, your chances of falling victim to the AMT run higher.

Here's why.

The AMT Conundrum

There are two parallel income tax systems in the U.S.: the regular ordinary income tax system and the alternative minimum tax system.

Technically, you have to calculate your tax bill under both systems and pay whichever bill is higher. For those of you who aren't in AMT land yet, you probably had no idea that your tax return was calculated two different ways. When you plug your information into a tax preparation program like TurboTax, it calculates both tax bills without you even knowing.

But to better understand this ridiculous system, let's walk through the process.