Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.

March 15, 2002

"The Complicated Alternative Minimum Tax"

Host: Think about the IRS. Now, think about the AMT. On this weeks edition of "The Road to Riches," personal finance expert Jordan Goodman explains what it is -- and why it's gonna get you.

As you struggle through filing your taxes this year, you may be hit with a tax that you never really had to deal with before called the "alternative minimum tax." Known as the "AMT," it is a "stealth tax" because it kind of sneaks upon you -- you have to figure it out in addition to your regular tax and see if you have to pay more under the AMT.

The AMT was put into the tax law in 1969 as a way to make sure that rich people had to pay at least some taxes every year. At that time, there were all these stories about multimillionaires not paying any taxes because of all the fancy tax shelters they were using. But what was designed for the super-rich is now hitting the American middle class, and it is projected to hit you even harder in coming years. The Treasury Department estimates that 2.7 million Americans will pay the AMT this year, double the level of just 2 years ago. By 2010, it will hit 35 million Americans, or almost everyone making more than $100,000 a year.

What is the AMT? When you calculate it, you calculate your income without certain deductions and credits you'd otherwise be allowed to take. For example, you can't count dependent deductions, state and local income taxes, or miscellaneous deductions or medical expenses. In all, there are 28 of these, which are called "adjustments" or "preferences." After you calculate your AMT, you have to pay a tax rate of 26 percent of the first $175,000 of income and 28 percent on any income over that amount.

There really is not too much you can do to avoid paying the AMT, if it hits you. About all you can do is to bunch your deductions in 1 year and not the next. If you have a load of miscellaneous deductions and expenses in 2002, try to minimize them in 2003, so you will only be hit by the AMT in one, and not both years. If you have an older child who earns his/her own income, you might want to "emancipate" them tax-wise -- that is, having them provide more than half their support. You won't claim them as a dependent deduction, which you would lose to the AMT anyway, but they can file their own tax return and claim themselves.

The AMT is so complicated that it is almost impossible for you to figure it out on your own. You will need a professional tax preparer, or at least tax software like TurboTax or TaxCut, to make sure you get it right.

The big problem with the AMT is that President Bush's tax cut made it far worse. Regular income tax rates have been cut, but AMT rates stayed the same, so it will hit far more people than it was ever intended to affect.

There is a move in Congress to repeal the AMT, but only as it affects corporations. Corporations lobby against it all the time, but no one is speaking up for individuals hit by the AMT. The Treasury estimates it would cost them over $600 billion over the next 10 years if it was repealed, so don't expect them to lobby for a repeal. And don't expect any relief anytime soon.

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