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The AMT is not just for the wealthy

The alternative minimum tax (AMT) has been called the stealth tax, and with good reason: Although intended for the rich, the AMT is affecting more middle-income Americans than ever before, in large part because it has only been adjusted for inflation twice since its introduction in 1969. If Congress does not act to limit the AMT's reach, even more taxpayers could face higher federal income taxes in 2006.

Whether or not Congress agrees soon to rein in the AMT, a general understanding of how the tax works may help you avoid it.

The Other Income Tax

The AMT truly functions as an "alternative" federal tax system. It has its own set of rates and rules for deductions, which are more restrictive than the regular rules. It operates in parallel with the regular income tax system in that if you're already paying at least as much under the "regular" income tax as you would under AMT, you don't have to pay it.

But if your regular tax falls below this minimum, you have to make up the difference by paying the AMT.

This tax can be triggered in a number of different ways. Although those with higher incomes are more susceptible to the tax, many other factors such as the amount of exemptions or deductions can also prompt the tax. Even commonplace items such as a deduction for state income tax or interest on a second mortgage can set off the AMT.

Watch for red flags and avoid the AMT

There are various factors that can help trigger the AMT such as gross incomes avove $100,000; large numbers of personal exemptions, large capital gains and exercised incentive stock options. AMT rates start at 26 percent, rising to 28 percent at higher income levels, compared to regular federal tax rates which start at 10 percent and step up to 35 percent.

Groen, Kluka & Company, P.C. can help you avoid or minimize the impact of the AMT. This can be done by better timing capital gains and deductible expenses. For more information call 248-362-5000.