updated 2/17/2006 5:27:24 PM ET 2006-02-17T22:27:24

They may not know it, but millions of taxpayers could be at risk this year of owing the alternative minimum tax.

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Roughly 3.5 million individuals and families filling out their 2005 tax returns or visiting their accountants this spring will discover they owe the tax. It was originally imposed to make sure that the wealthiest couldn’t use tax breaks or deductions to eliminate their entire tax liability.

But inflation and recent tax cuts push more and more taxpayers into the grasp of the alternative minimum tax each year. Lawmakers had blunted the tax’s effect on upper- and middle-income families in previous years, but ran out of time to keep the fix in place this year. Those laws expired at the end of 2005. This year, more than 15 million additional taxpayers could get tipped into the tax’s reach unless Congress acts first.

Although it’s expected that lawmakers will act to retroactively stop the tax from hitting millions more individuals and families, taxpayers and their financial advisers start the year in a cloud of uncertainty.

“Normally, we tell our clients to plan for the worst case and hope for the best. This one’s kind of tricky,” said Don Weigandt, who advises wealthy individuals at JPMorgan Private Bank.

The alternative minimum tax, also known as the AMT, works as a second system of taxation that runs parallel to the regular income tax. If you owe more under the alternative tax than the regular tax, you pay the higher amount. If you don’t, the AMT can still limit the size of your tax credits.

The alternative minimum tax can be unpredictable, but it tends to hit individuals and families with certain characteristics. Tax advisers say those include middle- to upper-income people who live in states with high income or real estate taxes, have several children or take sizable deductions for things like business expenses.

The Internal Revenue Service has a tool to help taxpayers determine whether they need to pay attention to the tax. The AMT Assistant, available on the tax agency’s Web site, is an automated version of a paper form and also an indication of the complexity involved in its computations. It’s called the “Worksheet to See if You Should Fill in Form 6251 — Line 45.”

The AMT Assistant could be most helpful for taxpayers doing their returns by hand. Most tax preparation software checks for the alternative minimum tax automatically. Other taxpayers need to complete a draft of the Form 1040 through line 44 to answer some questions about income and certain deductions.

There’s no easy way to know whether the AMT lies in your future without doing some calculations.

“One of the things about the AMT is that the AMT is illogical and inconsistent in its application as to who it affects and why. There’s no real pattern. There’s no logic behind it,” said Alan Dlugash, an accountant for high net worth individuals and a partner at Marks, Paneth and Shron LLP in New York.

“So the way you have to deal with it is you have to say, OK, let’s run the numbers.”

Tax advisers recommend that individuals and families who might fall into the alternative minimum tax next year make some of those calculations, even though Congress will probably make sure that millions of threatened families never pay the tax.

Ways and Means Committee Chairman Bill Thomas, the California Republican who serves as the House’s top tax writer, said taxpayers take a risk if they assume lawmakers will retroactively remove the tax. But he said there’s a bipartisan commitment to addressing the problem. “The question is when and how,” he said.

Even if you know it’s coming, it’s difficult to escape the alternative minimum tax. Unless you want to relocate to another state, most planning options involve the timing of deductions and incentive stock options.

“The important thing to understand is there are certain things you can do. They may or may not help you,” said Jackie Perlman, a senior tax research coordinator for H&R Block. “It’s not something that is just totally and completely under control.”

If you’re totally perplexed by the tax, at least take heart that you’re not alone.

“Being somebody who’s been a tax lawyer for over 30 years, I find the AMT to be almost inscrutable,” Weigandt said.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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