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Originally written by Thuryl:

I'd shake hands with whoever's responsible, but, well, I don't know where those hands have been.

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Originally written by The Almighty Doer of Stuff:

From AOL Personal Finance, Feb 16:
quote:The Stealth Tax
The AMT now sideswipes 3 million taxpayers. Think you're not one of them? Better cross your fingers.

Nina Olsen has been practicing tax law for nearly 30 years. These days, she's the nation's taxpayer advocate -- the in-house representative of ordinary citizens at the Internal Revenue Service. And she knows about as much as anyone about the tax code. But Olsen was stunned last spring when she finished running her return through a commercial tax-prep program. There on line 43 of her Form 1040 was an extra levy of $721. "I was just like, 'Wait a minute, how did that happen?"'

"That" was the price of the nastiest tax lurking in the code -- the alternative minimum tax. First enacted in 1969 to rope in 155 fat cats who had escaped paying taxes altogether, the AMT today reaches far beyond the superwealthy dodgers it was supposed to target. This year, more than 3 million taxpayers -- most of them middle-class and upper-middle-class couples with kids -- are going to get clobbered by the tax. True, these taxpayers have benefited greatly from lower tax rates on income, capital gains, and dividends. But many of these advantages are being eroded by a tax that's largely hidden, difficult to plan for, and perverse in its consequences.

And odds are, you could be a victim. Those W-2 wage reports and Form 1099 brokerage statements you just received could contain one of the land mines -- high state and local taxes, hefty job-related expenses, incentive stock options, or certain kinds of municipal-bond interest -- that blow unwitting victims into the AMT swamp. And if you get caught, odds are the price tag will be steep. If you are making between $100,000 and $200,000, figure on paying nearly $3,000 in extra tax.

Just how does the AMT work? Think of it as a parallel universe where you must calculate your taxes twice. First, you fill out your 1040 the regular way -- adding up total income, subtracting deductions and personal exemptions to determine taxable income, and then figuring your tax. Under the AMT, you must do the whole thing again. But this time, you are not allowed to use many valuable deductions to reduce your taxable income. You figure what's owed under the AMT, compare it to your regular tax bill, and pay the higher amount. The excess over the regular bill is, in essence, your AMT.

`IT'S HORRIBLE'
The AMT went haywire because it does not take inflation into account. The regular tax adjusts brackets and personal exemptions for higher prices and income, but the AMT does not. So as incomes rise, more and more people are caught. And Bush's recent tax cuts just make matters worse. Since you must pay the higher of the two taxes, the recent changes that lower your regular tax just make it more likely you'll be paying the AMT.

If you've managed to escape the tax so far, your reprieve is almost certainly temporary. The levy is growing like the monster from the tax lagoon. By the end of this decade, barring reform, this stealth tax will strike 33 million annually -- or one-third of all taxpayers -- according to estimates by the Urban-Brookings Tax Policy Center. It will hit 9 out of 10 making between $100,000 to $500,000 in today's dollars, and more than 70% of those making $75,000 to $100,000. And it is turning the concept of a progressive tax code on its head: The very wealthy often pay a smaller share of their income in AMT taxes than the upper middle class.

Even for many middle-class families, the AMT and its devilishly complicated Form 6251 will be the tax code -- not the regular income tax on Form 1040. "The cop and the nurse with two kids are going to get nailed," says Brookings Institution tax economist William G. Gale.

Escaping the AMT isn't easy. Tax planning can't change the number of kids you have or the levies imposed by your state -- the two most common AMT tripwires. Steps you would normally take to cut your taxes, such as deferring a yearend bonus, can backfire when you're in the AMT. Planning may help those who are on the edge avoid the AMT in a particular year, but the moves must be carefully timed.

You might think that elected officials would be eager to reform a pernicious, capricious tax that adds complexity and cost. But think again. By Washington standards, the AMT is a success: In 2003, the minimum tax caught roughly 2,700 wealthy Americans who otherwise would have zeroed out their taxes. But it also caught more than 2 million others, all of whom had already paid tax. And at least 600 fat cats still managed to avoid all federal income taxes. Why? The AMT hasn't caught up with such schemes as moving income offshore or swapping assets to create tax losses.

It's no wonder that on Dec. 31, in her annual report to Congress, the IRS's Olsen named the AMT the biggest problem taxpayers face today. Picking the worst tax is akin to choosing the most tasteless TV reality show, but Olsen says the AMT wins hands down. "It's horrible," she says.

Washington's dirty secret is that the minimum tax has become a money machine. Over the next decade, it would cost the feds nearly $1 trillion in foregone revenues to repeal the tax. And even the simplest fix -- annual inflation adjustments -- would sport a $480 billion price tag, according to the nonpartisan Congressional Budget Office. As more people feel the AMT's pinch, Washington is likely to respond only with temporary patchwork fixes, as President Bush proposed in his Feb. 2 budget.

Indeed, under the AMT, you lose those personal exemptions -- $3,050 for each dependent -- and deductions for state and local taxes. You say goodbye to miscellaneous itemized deductions, such as money-management fees or business expenses your company doesn't reimburse. You can still use your deductions for some mortgage interest, charitable gifts, and child credits.

At its worst, the AMT can tax income you don't even collect. Say you win $300,000 in a lawsuit, and your lawyer takes a $100,000 fee. Under the ordinary tax, you'll pay taxes on just the $200,000 you take home. But under the AMT, you can be assessed on the entire settlement -- and pay up to $28,000 in tax on money you never saw.

Some of the deductions you're required to add back to your income are supposed to keep tax dodgers at bay. Some, like special depreciation for oil and gas rigs, have been tax-shelter favorites for years.

In place of these write-offs, you are allowed to claim only the AMT exemption: $58,000 for a couple or $40,250 if you are single. On what's left, you figure tax of 26% on the first $175,000, and 28% on the excess. And of course, the IRS gets either the regular tax or your AMT tab -- whichever is higher. Keep in mind that the $58,000 deduction starts to phase out after your income exceeds $150,000. It disappears altogether at $382,000.

`I CAN'T AVOID IT'
As it takes over the tax code, the AMT will effectively repeal much of the Bush tax cuts: By 2010, the AMT will swallow one-third of the value of the 2001 and 2003 rate reductions. Taxpayers with incomes of $100,000 to $500,000 will lose two-thirds of their tax cut. And that debate over whether to make President Bush's rate cuts permanent? It won't matter to many taxpayers for whom the only rates that will count are the 26% and 28% of the AMT.

For hundreds of thousands of upper-middle-class families, the AMT is already eroding last year's reductions in capital-gains and dividend taxes. And even as politicians vie to ease taxes on families, the AMT actually imposes a penalty on those who marry. Today, a husband and wife earning $100,000 each, with four kids, will pay $1,470 more in AMT taxes than if they split up. By 2010, married couples will be 20 times as likely to be zinged by the AMT as singles.

Even if you don't have to pay the tax, you'll still have to fill out the mind-numbing, 65-line Form 6251 just to find out. That chore is nearly impossible without the help of either tax software or a professional preparer.

Barry Picker is a tax pro -- a Brooklyn (N.Y.) CPA and a certified financial planner, and his family has fallen into the AMT. He makes less than $200,000 a year and isn't into fancy tax-avoidance schemes. But Barry and his wife Robin have three kids they claim as dependents, and they live in high-tax New York. So, in he goes. "I can't avoid it," Picker says.

In some states, just paying local taxes is enough to drop you into AMT hell. That's what happened to Jim and Jackie McCaffrey. Last year, Jim, then a New York City police officer, and Jackie, a vice-president for sales at Aetna Inc., (AET ) got hammered with an extra AMT tax of $3,658. All of it resulted from their high city and state taxes, says Frank Degen, the enrolled agent who prepared their return. "It's a double whammy," says Degen. "The more taxes you pay on a local level, the more you pay on a federal level."

What can you do about the AMT? Often, not much. No amount of planning will help the McCaffreys. They are stuck, and shifting income from one year to the next won't help at all.

Nor can Aase Christensen do much. She's a financial adviser at a Santa Barbara (Calif.) office of a national brokerage firm who fell into the AMT because she supplements the salary of her assistant out of her own paycheck and takes a deduction for it. That's one of those miscellaneous deductions that gets added back into the AMT. Her bill last year: $1,243.

If you are on the edge of paying the AMT, there are a few ways to ease the bite. "You can't stop it," says Bill Wixon, a Plymouth (Minn.) financial planner. "But you can minimize it."

It's too late to do anything about your 2003 taxes, but you should start thinking about 2004 and 2005. First, you need to unlearn everything you know about reducing taxes. If you're paying the regular tax, you usually want to take deductions right away and postpone income until next year. That may boost your taxes in the future, but it will help now.

By contrast, if you are going to get hit by the alternative tax, you may want to do the reverse. For instance, if you have a property-tax payment due around yearend, you can delay writing the check until January. That will trim the state and local tax deductions that can dump you into the AMT. At the same time, if you have a bonus due, you might try to get it this year. Such a move will increase your regular tax, but could keep you out of the AMT this year and reduce your tax bill next year.

`IT WAS DELIBERATE'
Those sorts of shifts may not help much if you are permanently trapped in the AMT. But if you are in danger of falling in for just a year because, say, you exercised stock options, timing changes can help. "If you are in the AMT one year and not the next, planning around that makes sense," says Paula Hogan of Hogan Financial Management in Milwaukee.

Handling stock options takes great care if you are at risk of getting nailed by the AMT. For instance, you might want to accelerate common, nonqualified options -- the kind that are taxed as ordinary income -- into an AMT year. That might produce enough income to keep you out of the alternative tax, and you'll have less income in the following year, when you might have other circumstances that keep you out of the AMT.

Incentive stock options (ISOs) are another matter. Normally, you don't owe any tax when you exercise an ISO -- you pay capital-gains taxes only when you actually sell the shares. But for the purposes of the AMT, you must include ISO income when you merely exercise the options. Says Raymond G. Russolillo, director of tax-consulting services at U.S. Trust Corp.: "If you're in the AMT, don't exercise ISOs," he warns.

And be warned, thousands of taxpayers were badly burned in 2000 and 2001 when they exercised ISOs but waited to sell the stock. When prices plunged, their tax bill vastly exceeded their profits from the stock sale. If you are likely to pay the AMT, it's critical to sell the shares in the same year that you exercise options.

As the AMT spreads its tentacles, such planning could become routine for executives, entrepreneurs, and investors with incomes up to $500,000. For the wealthy -- the AMT's original targets -- the tax is much less of a problem. Because the top bracket for the regular tax is 35% -- much higher than the top 28% AMT rate -- most high-income taxpayers pay more tax on their 1040 than they owe under the AMT.

Many high-roller, tax-avoidance techniques still work just fine for escaping the AMT. For the very rich, sophisticated shelters remain the tax-avoidance scheme of choice. These deals often involve using a series of fully hedged transactions to turn ordinary income into capital gains. Further transactions are designed to reduce or even eliminate the gain itself. As a result, what had been fully taxable income simply disappears. For the very wealthy, says Urban Institute tax economist Leonard E. Burman, "capital gains are the linchpin of many shelters." And unlike deductions for, say, oil-and-gas drilling, the AMT doesn't take away the low capital-gains tax rates.

Sounds like a sweet deal. Want to know how to get into one? Well these days, it's tough. Modern shelters are extraordinarily complex, carry fees of $50,000 and up, and require minimum investments in the millions.

Some high-end investments can provide income that's completely sheltered from tax -- including the AMT. Tucker Watkins, a senior financial adviser with American Express Co. (AXP ) in Irvine, Calif., suggests products such as variable universal life-insurance policies, which build up tax-free income. But those investments take years to pay off and fees can be steep.

How did a tax aimed at 155 people get so out of control? In part, it's because Congress targeted mainstream deductions, such as those for state and local taxes. In 1986, President Ronald Reagan wanted to repeal the state tax deduction to help pay for a massive federal tax-reform bill. Governors strongly objected. The compromise: Throw state and local tax deductions into the AMT. Trouble is, now there are millions who are losing the write-off.

Some say the vast reach of today's AMT is an unintended consequence of the complex tax laws. But both Democratic and Republican congressional aides say Washington has been aware of the AMT nightmare every step of the way. As far back as 1996, internal congressional estimates showed that each successive tax cut would push more families into the AMT -- reducing the cost of tax cuts by taking back with one hand some of the goodies offered by the other. Even in 2001 and 2003, lawmakers quietly counted on billions in new AMT revenues while passing the Bush tax bills. "It was conscious," insists John Buckley, Democratic tax counsel for the House Ways & Means Committee. "It was deliberate."

A big problem is that the exemption that taxpayers get in place of those lost deductions has not been adjusted for inflation. If it had, the exemption -- now $58,000 for couples -- would be $74,300, and the AMT would hit fewer than 1 million taxpayers rather than 3 million, according to the Tax Policy Center.

After this year, that $58,000 exemption is due to expire. If Congress fails to extend it, the exemption will fall to its pre-2001 level of $45,000. Then, 9 million more taxpayers will get hammered. In his Feb. 2 budget, Bush proposed to extend the $58,000 through 2005. This temporary repair won't help those already getting hit, but it would delay the day of reckoning for millions of others. The fix would cost $23 billion, so in an election year, approval is no sure thing.

Congress won't let the alternative minimum tax get completely out of control. It will do just enough to prevent a march on Washington by pitchfork-wielding, Form 6251-burning taxpayers. But millions of Americans will remain mired in the AMT. That means that the far-from-wealthy families who dutifully pay thousands in taxes every year will continue to fall victim to the tax code's most unpleasant surprise.

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