Alternative minimum tax snares more in middle class

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When Congress approved the alternative minimum tax more than 30 years ago, the goal was to catch a couple of hundred millionaires who paid no taxes.

The strategy succeeded so well that today it's catching not only the wealthy but an increasing number of unsuspecting middle-class families, leading some to call it the "stealth tax."

An estimated 2 million Americans paid the alternative tax last year, and the number is expected to increase to more than 3 million this year.

Those numbers may not seem so high, given that 130 million income-tax returns are filed with the Internal Revenue Service each year. But according to studies by the nonprofit Tax Policy Center in Washington, if the law isn't changed, about 33 million households will be paying the AMT by the end of the decade.

"There's going to be a huge outcry over this eventually," said Karen Brosi, a tax expert with the California Society of Enrolled Agents. Enrolled agents are licensed by the government to assist consumers with their taxes.

The AMT is an extra tax some people have to pay on top of their regular income tax, especially those with high incomes who reduce their tax liability with a lot of deductions.

The way it works is that people first fill out their 1040 tax forms. Then they redo the calculations on the AMT Form 6251 -- but without most of the exemptions and deductions that are allowed on the 1040. They pay whichever tax amount is higher.

More people are being caught up in the system because the standard exemptions and deductions have been adjusted regularly for inflation. The AMT system, meanwhile, has been tweaked only periodically.

Besides high income, other factors can throw taxpayers into AMT. These include having a large number of children or paying high local income and property taxes in states such as California, New York and Massachusetts and the District of Columbia. Exercising incentive stock options can ensnare others.