Am I an alternative minimum tax 'victim'?

John W. Schoen Senior Producer • Profile • E-mail

Now that the 2006 tax year is over, some Answer Desk readers are beginning to think about pulling together their return. And more and more are getting hit by the dreaded alternative minimum tax (AMT). Joe in Wisconsin wants to know if there's a simple way figure out if you're in the AMT's path.

How do you know if you are an alternative minimum tax "victim"?
-- Joe E., Green Bay, Wis.

What makes the dreaded alternative minimum tax truly evil is that there is no foolproof way to know ahead of time whether it’s going to bite you. It's not based just an income threshold, and a lot depends on what kind of deductions you plan to claim.

When first introduced in 1970, the AMT was supposed to close “tax loopholes for the rich” —who were then able to shelter income from taxes using a variety of dodges. Most of those shelters were eliminated in the 1986 round of tax reform.

But the AMT, which creates a parallel universe with its own tax rates and rules for deductions, lived on. And the big problem is that the numbers used to describe who was “rich” weren’t indexed to inflation.

As a result, more and more middle-income taxpayers are getting gobbled up by the AMT monster. Unless Congress acts, this tax will hit more than two-thirds of all taxpayers with adjusted gross incomes of $50,000 to $100,000 by 2010, according to a 2005 report by the Congressional Research Office.

Congress has tried to tweak the law to tame the AMT, and some in the new Congress want to try to slay it. (Senate Bill 55, introduced earlier this month, would repeal the AMT starting in 2007.) But for the 2006 tax year, it’s still alive and well and raking in piles of stealth revenues for the government. And that’s the real reason it hasn’t gone away.

With the federal budget already deeply in the red, doing away with the AMT will cost hundreds of billions of dollars — money the government can’t afford without making some serious spending cuts. One estimate by the Congressional Budget Office found that just indexing the AMT to inflation would cost $513 billion over 10 years. If the Bush tax cuts — now set to expire in 2010 — are extended, the cost would be higher.

In the meantime, the IRS has a "simple" tool on their Web site that's supposed to help find out if you’ve been thrown under the oncoming AMT train for 2006.

The site claims this should exercise take "5 or 10 minutes." But before you begin, you have to have your 1040 filled out so you can enter information from that form to the online tool. There are several other forms you need to fill out first, including a Schedule A for any itemized deductions.

The first step lists a bunch of fairly obscure exemptions, deductions or exclusions that automatically make you an AMT suspect — but doesn't necessarily warrant a conviction. The list includes things like "Section 1202 exclusion," "Qualified electric vehicle credit," and "Income from long-term contracts not figured using the percentage-of-completion method." (That last one is worth "5 to 10 minutes" alone just to figure out what it means.)

Unfortunately, the list also includes "Interest paid on a home mortgage NOT used to buy, build or substantially improve your home" — which is one of the most widely available deductions left for most households. If you plan to take this deduction, you go immediately to the AMT Form 6251, do not pass go, and under no circumstances collect $200. 

In the end, you pretty much have to do your return and then serve it up to the AMT monster and see if you're a victim.

So about the only ones benefiting from this law are the accountants we have to pay to figure all this out.

Happy filing.

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