Were you among the several million taxpayers who had to pay the alternative minimum tax (AMT) last year? Even if you escaped in 2006, keep reading! Unless the law changes, you could be among the millions more who’ll have to pay AMT in the years ahead.

The AMT was set up in the 1960s to make sure wealthy taxpayers didn’t use deductions and exemptions to avoid paying any tax. It applies a 26% or 28% tax rate to income above a certain exempt amount. The problem is that the exempt amount was never indexed for inflation, so more and more middle-income earners find themselves above the threshold.

For 2006 tax returns, the exempt amount was $62,550 for married filers, $42,500 for singles. This may sound generous. But you can’t claim personal or dependent exemptions, the standard deduction, or some itemized deductions against the AMT. So if you have a large family or pay high property and state income taxes, you could be vulnerable. Exercising incentive stock options can also trigger an AMT bill. And unless Congress acts again, the amounts will fall back to lower levels this year.

It’s wise to find out if you’re likely to be affected by the AMT this year or next. If you are, you may be able to take steps to minimize your overall tax bill. Strategies might include adjusting when you make tax payments or charitable contributions, accelerating income, or changing how you exercise stock options.

Obtaining the assistance of a tax professional may be the best tax planning technique of all. The alternative minimum tax is highly complex, and professional help in this area may be essential to avoid an unexpected tax bill.



David Compton is a Certified Public Accountant with offices in Meridian and Birmingham, Ala.