AMT: Little Tax of Horrors

Editor's note: As a special feature for March, TheStreet.com offers an ongoing series on everything you need to know about taxes.Today is Part Four.

The alternative minimum tax is regarded by many experts as one of the most complex and confusing taxes on the books. But to understand its effect is simple: Simply think of the AMT as you would the main character of the 1980 horror film Alligator.

In that movie, the baby reptile was mindlessly flushed down a toilet and into the city's sewers. Forgotten but not gone, the little guy eventually grew into a 36-foot long man-eating monstrosity.

The AMT was once harmless, too. Introduced in 1969, the tax was created to prevent the wealthiest Americans from contributing virtually nothing in taxes.

But just like that baby alligator, the AMT was also forgotten about -- that is until it grew so large it started chomping at millions of Americans' assets.

A Growing Problem

"What's happening now is that if you don't adjust the threshold, a huge amount of people will be subject to the AMT," says Robert Bixby, executive director of the Concord Coalition, a nonpartisan group advocating fiscal responsibility. "More than 4 million people were subjected to the AMT last year. If the laws aren't changed, over 23 million will have to pay the AMT this year."

The Congressional Budget Office also estimates that if the current law isn't changed, 70% of all taxpayers in 2050 will be affected by the AMT, and the additional revenue from it will account for 20% of the personal income taxes collected by the government.

The most-likely candidates for the AMT are those with an adjusted gross income of $200,000 to $500,000 a year. Below is a table demonstrating the recent growth of the tax, which has increased almost tenfold in just 10 years.

The Rise of the AMT (1995-2005)
Year	Number of Returns Subject to AMT	Additional AMT Liability
1995	414,106	$2.29 billion
1996	477,898	$2.81 billion
1997	618,072	$4 billion
1998	853,433	$5.01 billion
1999	1,018,063	$6.48 billion
2000	1,304,198	$9.6 billion
2001	1,120,047	$6.76 billion
2002	1,910,789	$6.85 billion
2003	2,357,975	$9.47 billion
2004	3,096,299	$13.02 billion
2005	3,600,000	$20.7 billion
Source: The Tax Foundation

Best Intentions Gone Awry

Although the tax has gotten out of hand, the original concept of the AMT was not a bad idea. It had been designed to prevent taxpayers from stiffing the IRS by using deductions and shelters to eliminate their burden.

In 1969, it had become a hot topic when then-Treasury Secretary Joseph Barr informed Congress that 155 families with incomes of more than $200,000 had managed to pay zero taxes.

The structure of the tax is rather complicated, but in a nutshell, the AMT works as a parallel tax that is imposed on top of the regular tax structure. If the AMT is higher than the regular tax liability for the year, the regular tax and the amount by which the AMT exceeds the regular tax are owed to the IRS.

"We think that the idea of a parallel tax calculation is preposterously complex," says Bill Ahern, a spokesman for the Tax Foundation, a nonpartisan group promoting tax education. "We feel the AMT problem would go away if even just the few unjustifiable exemptions on the regular side were repealed. That would be the clean way to dispense of the AMT problem."