Alternative Minimum Tax and the "bailout bill"

One of the many special provisions included in the bailout bill passed by U.S. lawmakers last week was a "fix" for 2008 for the Alternative Minimum Tax (AMT). This tax dates back to 1970, when a small number of high-income taxpayers were paying little to no tax because of all the deductions they had. AMT was created, and essentially it takes away some deductions for these taxpayers, uses a higher-than-normal tax rate, and results in additional tax due.

When the law was first enacted, only 19,000 taxpayers paid AMT. But the numbers in the law haven't been indexed for inflation, so without a yearly fix like lawmakers just made, a lot of middle class taxpayers could be caught by AMT and would owe a couple thousand dollars in extra income taxes.

The bailout bill specifies that the AMT exemption for 2008 will be increased around $46,000 for single taxpayers, and almost $70,000 for those filing joint. That increase means fewer Americans are subject to AMT, essentially protecting the middle class for another year.