To calculate AMT, you add several common deduction items to your taxable income, subtract the AMT exemption amount ($62,550 for married taxpayers filing jointly, $42,500 for single taxpayers, and $31,275 for married taxpayers filing separately in 2006), and multiply the result by the AMT rates — 26% of the first $175,000 of income and 28% on amounts over that. If the AMT exceeds your regular income tax, the difference must be paid as the AMT.

Why are so many taxpayers becoming subject to the AMT? A primary reason is that ordinary income tax brackets are adjusted for inflation annually, while the AMT exemption amounts are not adjusted for inflation. Thus, as income levels rise, more individuals are subject to the AMT. Another reason is that regular income tax rates were recently reduced, while the AMT tax rates remained the same.

Low-income taxpayers are typically not subject to the AMT because the AMT exemption amounts shield them from the tax. Very wealthy taxpayers are also not typically affected because their overall tax rates are higher than the AMT tax rates. The Congressional Budget Office estimates that taxpayers earning between $50,000 and $200,000 will be the hardest hit by the AMT in the near future. It is estimated that if the AMT is not revised, it will affect 17% of taxpayers with income between $50,000 and $75,000, 53% of those with income between $75,000 and $100,000, 81% of those with income between $100,000 and $200,000, and 94% of those with income between $200,000 and $500,000 (Source: Urban-Brookings Tax Policy Center Microsimulation Model, 2005). By 2007, the U.S. government will receive more tax revenue from the AMT than from regular income taxes.

While you may think it is taxpayers with complicated tax returns who are subject to the AMT, the most significant preference items when calculating the AMT in 2002 were state and local tax deductions (51% of all AMT preference items), personal exemptions (22% of all AMT preference items), and miscellaneous itemized deductions (20% of all AMT preference items) (Source: Tax Policy Center, March 13, 2006).

Because so many items are added back to income in the AMT calculation, whether you are subject to the AMT can affect tax planning strategies. Consider these tips if you are subject to the AMT:

• If you are subject to the AMT every year, it may be difficult to find strategies to reduce your liability, especially when you are subject to it due to items like state and local tax deductions and personal exemptions.

• If you are subject to the AMT in one year but not the following year, you may want to accelerate income (so income is taxed at lower rates) or postpone deductions (many of which are added back in the AMT calculation).

• If you plan to sell assets with significant capital gains, review the impact this will have on the AMT. Although long-term capital gains are still subject to a maximum income tax rate of 15%, it may cause your other income to be taxed at higher rates due to the phase out of the AMT exemption amounts.

• If you are going to exercise incentive stock options, do so in the early part of the year. For AMT purposes, the difference between your exercise price and the market price on the exercise date is considered income, even if you don’t sell the stock or the value decreases after exercise. You might want to exercise stock options early in the year. Then, near the end of the year, you can sell the stock if the price goes down so you won’t be subject to the AMT on the option exercise.