In 1969 the federal government enacted the Tax Reform Act of 1969. Included in that Act was a provision now commonly referred to as AMT or the Alternative Minimum Tax. Designed to fix a loophole in the US tax code - it was to eliminate the ability of high income taxpayers to be able to use deductions so they would be able to eliminate all or almost all of their tax liability.

Fast forward to now - and more and more Americans are subject to this tax than ever before and those for whom the tax was originally designed are still able to reduce their tax burden percentages substantially below those of the average taxpayer. The Congressional Budget Office estimates that by 2010 more than 30 MILLION taxpayers will be paying more taxes due to the AMT method of tax calculations. Even greater numbers will be required to calculate their taxes due using this method in addition to the more traditional form of tax preparation. What is happening is that more and more Americans are being required to use both forms of tax analysis to determine how much they truly will owe each year.

So what happened with a law that was supposed to only be targeting those with very high incomes? The number one reason is inflation. Inflation factors are built into the traditional tax brackets and tax which adjusts every year. Under the Alternative Minimum Tax, taxpayers earning as little as $75,000 need to pay attention to this tax calculation. Areas that can trigger this include: deductions from having multiple children, incentive stock options and interest deductions from a second mortgage can be at risk under the AMT.

The AMT cuts back and eliminates some of the deductions and credits that taxpayers generally use in calculating their tax liability. In addition to those mentioned above, some of the eliminated tax credits and deductions include:
* Itemized medical expenses if they are medical expenses that are less than 10% of adjusted gross income
* Itemized deduction for local and state taxes
* Personal exemption
* Standard deduction

When calculating the AMT liability, the rules are complicated and cumbersome in determining your tax liability. There are separate exemption amounts, tax rates and available tax credits. IRS Form 6251 will walk you through the calculations to determine your tax liability under the AMT which can then be compared to the standard tax forms to see under which program you would be paying taxes. There is also an online 2007 AMT Assistant on the IRS website that individuals can use to calculate their AMT. If you use a tax software program, the program should be able to calculate that as well. The bottom line is that if the AMT is higher than the standard tax calculation you are then liable for the standard tax liability PLUS the difference between the AMT and the standard tax liability. This would be called your Alternative Minimum Tax amount. (See NOTE below)

This convoluted second form of tax calculations is being debated and discussed both on Wall Street and on Capitol Hill. The likelihood of it changing or being eliminated - is uncertain. Billions of dollars of additional revenues have come into the government due to this tax method. So, in the meantime, know the rules and make sure to calculate the AMT if you have any doubt.

NOTE: There is an AMT credit that can possibly be taken in future years for some of the AMT tax amount that is due this year depending upon certain specific criteria. If you find yourself falling under the AMT rules, it is worth exploring this credit!