The Widening AMT Net

When Congress passed the alternative minimum tax (AMT) almost 4 decades ago, it was aimed at fat-cat individuals who often used multiple deductions and complex tax shelters to avoid paying any income tax. But it hasn’t exactly worked out according to plan.

The AMT snagged 19,000 taxpayers back in 1970. Last year, an estimated 4 million taxpayers were hit by the tax. The primary problem, according to tax experts, is that the AMT standard exemption and income brackets were never indexed for inflation, which means that as incomes rose, more taxpayers fell into the AMT trap.

Until Congress recently raised these amounts, some estimates showed that virtually every American family with two or more children and an income of more than $75,000 would be paying the AMT by the year 2010. Even with those changes, the Treasury Department predicts that about 26 million taxpayers will fall victim to the AMT this year unless Congress acts again. Especially vulnerable are those with a lot of deductions that aren’t allowed under the AMT rules. These include personal exemptions, as well as state and local taxes, which means that large middle-income families—particularly those that live in high-tax states like California and New York—are likely candidates for the AMT.

Some tax mavens say that the AMT is even more complex than the regular tax code, if that’s possible. A recent Treasury report shows that, in 2006, about 226,000 tax returns contained AMT errors, with about 60,000 of those coming from taxpayers who should have paid the AMT but didn’t. The convoluted AMT rules have been a boon for CPAs, other professional tax preparers, and makers of income tax software. Most tax experts suggest that you get professional help with your tax return, especially if you fall into an AMT at-risk category.