The calculation of alternative minimum tax was poorly designed from the beginning. It didn’t just creep into the middleincome taxpayer level; in fact, it hit many middle-income taxpayers from the very beginning. As an income tax preparer, I run the AMT schedule for all clients because, although we expect it, we continue to be surprised by the profile of taxpayer that it hits. If you claim a lot of dependents, have a home equity line of credit or high state income taxes (a few examples only), you are a potential candidate (if you prepare your own tax return make sure that you complete form 6251 to see if you owe any AMT in addition to your regular tax). Relief has been provided in that the government increased the minimum level of taxable income under the AMT calculations, saving taxpayers caught in the AMT trap amounts in the thousands. And of course, the government will need to cut expenses or raise taxes elsewhere to make up the lost revenues.

The AMT Patch that Congress recently passed extends alternative minimum tax relief for nonrefundable personal credits and increases the AMT exemption to $69,950 for joint filers and $46,200 for individuals in 2008. For tax filers who were not subject to the AMT in 2007, these changes will generally protect them from being subjected to the AMT in 2008 all other things being equal. It also provides relief to taxpayers who recognized AMT income by exercising incentive stock options in which the stock subsequently lost value. It is true that the AMT was designed to prevent the wealthy from escaping taxes and has slowly but surely become an issue for the middleclass taxpayer. The main reasons for this are that the AMT was created in 1969, never indexed for inflation and Congress has not been in agreement on how to deal with this issue. The “patch” will help for now. Whether or not Congress will increase taxes elsewhere is not really the question in my opinion, and I stress that it is my opinion. The real questions are when will they increase taxes, which level of taxpayer will be most affected and how will small businesses be affected? We have been very focused on the plight of large businesses, and while they have a significant effect on our economy, they have, as we have seen, been the recipients of bailout provisions. It is important to remember that small businesses are the backbone of America, employing more individuals than all of the Fortune 100 companies employ worldwide. There are no bailout provisions for them and taxes are often their biggest concern. Increased taxes could put many of these businesses out of business and the associated loss of jobs and productivity could have serious implications. Let’s hope that the incredibly intelligent people we have in Congress use their intelligence wisely.

The AMT, once meant purely for very wealthy families, is striking those making $75,000 to $250,000 annually who claim relatively high tax deductions, such as property taxes, state and local income taxes and personal exemptions for children. When the tax applies, it effectively cancels some of those deductions. If left unchanged, the alternative minimum tax would produce more tax revenue by 2009 than the ordinary federal income tax. In five years, 30 million taxpayers are likely to pay the alternative minimum tax, many of them concentrated in high-tax states. Part of the problem is that the triggers for the alternative tax have not kept up with inflation, causing it to capture many people whose main deductions come from nothing more exotic than children and local taxes. Many of the families who have already been hit by the AMT make enough money that its cost is not a hardship. Barring a change, though, the tax will cover more than half of all households with incomes of $75,000 to $100,000 five years from now, the Tax Policy Center forecasts. Nearly all families who have children and make more than $100,000 would fall into it. The latest bailout bill extends relief from AMT for another year. The new president and Congress will have to wrestle with tax legislation and AMT in the next session of congress. In the meantime, do all you can to avoid the dreaded AMT!