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Alternative Universe

Nothing this side of the Boston Tea Party has raised as much ire as the alternative minimum tax, but there are things you can do to keep from getting mugged.

It has been called “illogical,”
“horrific,” “a slow-motion train
wreck,” and, most colorfully, the “roach
motel” of taxes: you check in but you
never check out. The alternative minimum
tax (AMT), dreamed up by Congress
in the late 1960s to make sure the
rich don’t exploit tax loopholes, now
affects more than 3 million American
taxpayers, and could apply to as many
as 31 percent of all taxpayers by 2010.

Today, most people who pay the
AMT make between $75,000 and
$400,000 a year — above the national
average, but far from rich. And while
Congress used the same “tax the rich”
political rhetoric in 1986 when it revised the law,
those changes actually seem to have widened the
pool of taxpayers subject to the AMT.

Critics say that the AMT is a misguided effort to
close tax loopholes that were eliminated 20 years ago.
The rules that govern the AMT create a sort of alternate
tax universe, one in which a slew of popular
deductions cherished by the middle class (state, local,
and property taxes; children; mortgage interest under
certain circumstances; and others) are replaced with
a single exemption that has not kept pace with inflation.
If a taxpayer is subject to the AMT, he or she
pays at or near the highest tax rate on all income, versus
paying a progressive rate that reaches the 28 percent
maximum level only on income above $74,000.

Can’t Go Home Again

Based on data from the Internal Revenue Service, the
average AMT filer paid an additional $6,000 in taxes
in 2004. Other calculations put the average tax hike
at more than $13,000 for someone making $100,000
annually (assuming a tax base after deductions of
$71,000).

In one way, unfortunately, the AMT is an undeniable
success: it is written to make it very hard to avoid.
The fundamental strategy for escaping it is to analyze
your potential deductions and any income that you
may be able to time (such as stock sales)
so as to avoid slipping into the AMT’s
grasp. “You have to run the numbers again
and again” looking for the optimal combination
of deductions and income that will
keep you rooted in the conventional tax
system, says Alan Dlugash, a tax accountant
with Marks Paneth and Shron who
works with high-net-worth clients.

Movin’ to Montana

One way to avoid the AMT is to kick the
kids out and move to Montana. That’s cold
(in more ways than one), but it illustrates
the frustrations posed by the AMT. The
$3,300 (inflation-adjusted) deduction families
receive for each member is ignored in
the AMT calculation, so larger families
often find themselves within striking distance
of the AMT even if their incomes are
fairly modest. State and local taxes account
for 48 percent of the preference items subject
to AMT but not to regular taxes, so
wage-earners living in high-tax states like
New York, California, and Massachusetts
are also ripe for the AMT.

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