Stealth Tax Spoils the Tax-Cut Party

First, calculate your regular tax bill. You know the drill here. You take all your income then subtract your dependent exemptions, your itemized deductions, credits for childcare, etc.

The final number is your taxable income and your tax rate is applied to that amount to determine how much you owe Uncle Sam.

Now calculate your bill under the AMT system, which has an entirely different set of rules. Start with your income. But then you don't have much subtracting to do because you're not allowed to count exemptions for dependents. And you can no longer deduct your state, local and/or property taxes. Oh, and you can't deduct the interest on that home equity loan you took out to pay for college. And those miscellaneous itemized deductions, forget those too.

So odds are good your taxable income under the AMT rules is higher than it was under the regular rules. Granted, the highest AMT rate only hits 28%, while under the regular system, your tax rate could pay be as high as 35%. "But the taxable income applied to that 28% is bigger under the AMT system, so the lower rate doesn't really matter," notes Laurie Asch, a senior tax analyst at RIA, a Thomson business providing tax information and software to tax professionals.

As a result, your tax bill under the AMT system could potentially come out higher, even with the lower rate.

Now President Bush wants to make the tax cuts of recent years permanent. Yippee!

Maybe for some.

But lowering those rates only increases the odds that when you figure your tax bill using the AMT rates, the AMT bill will be higher. That's why an estimated 20.5 million people will pay AMT in 2006, says Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research. And close to 30 million people will be doing it by 2010. That's one in three taxpayers.

Even worse, folks in the $75,000 to $100,000 income tax bracket are the most likely to get hit over the next couple of years.

Hello, Washington! It's high time you wake up to this.