Will You Pay the Alternative Minimum Tax?
The Alternative Minimum Tax (AMT) is a substitute tax that Congress enacted in 1969 because lawmakers felt that many high-income taxpayers were simply not paying income tax. They’d found ways to work the system, through tax deductions, shelters, income exclusions and tax credits.
The AMT has one fatal design flaw: it’s not indexed to inflation. Indexing is a process of adjusting amounts periodically to reflect an increase in the inflation rate. The IRS frequently indexes dollar amounts for taxable income, contributing to tax-advantaged retirement accounts and taking tax deductions.
What does this mean? It means that more and more regular joes are having to pay the tax, more people of what’s now considered average income. The lack of indexing in combination with the growth of incomes over the last 30 years has resulted in rapid growth of the number of people who pay the AMT. About 2.4 million Americans paid the AMT in 2002, according to the IRS. The U.S. Treasury’s Office of Tax Analysis projected that 16 percent of individual taxpayers will have to pay the AMT by 2010. The number of AMT taxpayers is expected to grow at an annual rate of almost 30 percent.
To get a grip on the situation, consult with a tax adviser. For additional information, see Tax Topic 556 at the IRS Web site (www.irs.gov).