AMT Relief in the Works, Says Congress

Imagine having to calculate your federal income taxes twice. That's actually what will happen to more than 20 million taxpayers in 2011 if Congress doesn't take steps to fix the alternative minimum tax, or AMT, before the end of the year.

When it was enacted in 1969, the AMT was intended to ensure that high-income taxpayers didn't avoid paying taxes. The idea was that wealthy taxpayers should not be able to whittle their taxable income down to zero by taking advantage of too many tax breaks, like the home mortgage interest deduction or real estate tax deductions. With the AMT, taxpayers calculate their federal income tax twice, once under the "regular" rules and again under the AMT rules, which eliminated most of those favorable tax breaks. Taxpayers would then pay the highest tax amount calculated under both schemes.

Over the years, however, the AMT hasn't worked as planned. The AMT hasn't been indexed for inflation, so the number of taxpayers subject to the tax includes those never intended to be affected in the first place. The National Taxpayer Advocate has reported that 77% of the income subject to AMT is actually attributable not so much to breaks associated with the wealthy but for the disallowance of "ordinary" deductions like those for state and local taxes as well as personal and dependency deductions.