The Alternative Minimum Tax was created almost 40 years ago and targeted high income households. The real reason AMT was created was to try and catch those wealthy folks who could shield their money from Uncle Sam through the use of various deductions.
Here is the catch, the AMT has not been adjusted for inflation like regular taxes. It is estimated that if congress does not make changes to the AMT by 2010, half of those earning between $75-100K will have to pay it!
It is difficult to determine if you will have to pay the AMT, you have to do your taxes under the regular tax rules and under the AMT rules. If the AMT tax is higher, that is what you have to pay. A faster way, is to use the AMT Assistant on the IRS's website (http://www.irs.gov/businesses/small/article/0,,id=150703,00.html).
Here are some things that make you more Iikely to pay the AMT:
- If you are in a higher income tax bracket
- If you take a large number of dependent exemptions
- If you have other substantial deductions
- If you deducted interest on a 2nd mortgage not used for residential purposes
- If you live in a high tax state
- If you exercised stock options and did not sell them the same year
You can learn more about the AMT, Tax Topic 556 at: http://www.irs.gov/taxtopics/tc556.html