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Tax Planning

The Alternative Minimum Tax Trap

How you could be a victim, too.

The alternative minimum tax is a parallel tax system developed 40 years ago to ensure that the very wealthy paid at least some income tax. But increasingly, it affects middle-income Americans, too. You must figure your taxes twice—under the regular tax rules and under the AMT—and pay whichever is higher.

The AMT disallows common deductions, such as state income taxes and local property taxes, as well as personal exemptions for you, your spouse and your children. As a result, you pay taxes on a larger portion of your income. The AMT also taxes paper profits when you exercise stock options. Based on your taxable income under the regular tax rules, you may be vulnerable to the AMT in 2009 if the income added back under the AMT equals or exceeds the amount shown in the column for your filing status.