Stealth Tax Spoils the Tax-Cut Party

So What Can You Do?

Aside from writing to your local representatives in Congress (I'm not kidding), if you think you're going to be sucked into AMT land, get help.

Unfortunately, there is no cookie cutter description of who will get hit with the AMT. However, if you have kids, own a home in a high-income-tax state like California or New York, you will most likely to get hit, warns Spiegelman.

So do some legwork. There's not a whole lot you can do for your 2004 return, but you can get a jump-start on 2005. Prepare your 2005 tax return under different scenarios so that you can maximize your situation.

You can try to estimate your 2005 return with a tax preparation program, even though it's not updated with the 2005 info yet, suggests Mark Luscombe, a principal federal tax analyst with CCH Inc., a provider of tax and business law information. At least it will give you a ballpark estimate of what your situation will look like.

And if you have an account with a broker like Schwab, check its Web site, as these sites generally offer planning tools to help you with these situations. Use something.

Here are some things to consider if you're in AMT land or on the cusp of it.

If you're thinking of taking out a home equity loan but are not planning on using the proceeds to improve your current home, know that you can't deduct that interest under the AMT system, says Asch. So take that into account before you take on the loan.

Consider timing your estimated payments of state and local income tax and your property tax. Let's say you won't be in AMT in 2005 but probably will get hit in 2006. Try to make your January 2006 payments before Dec. 31, 2005. Then you can claim the deduction for those payments on your 2005 return. Remember, once you are subject to AMT, you lose those deductions.

If you're planning on taking advantage of the new sales tax deduction, know that you cannot deduct it when you calculate your AMT bill, reminds Luscombe. So folks in states like Florida and Texas, who may be very happy about the ability to deduct sales tax, may now find themselves in an AMT situation as a result.

If you have incentive stock options, be careful when you exercise them. "If you plan on holding the stock after your exercise, run some projections to see if there's a break-even point at which you enter AMT territory," suggests Spiegelman.

This stuff is ridiculously complicated. So if you're not willing to sit down and learn it (who is?), then get professional help.

And then start complaining. I highly doubt that the average member of Congress, back in 1969, intended for the AMT to be such a burden to so many taxpayers, but it is; and something needs to be done about it.