So, how did we get here? How did a federal tax rule originally designed to affect only a small number of the most affluent U.S. taxpayers wind up adding to the tax burden for an increasing number of middle- and upper-middle-income taxpayers?

There are two primary reasons for the AMT's current explosion:

  the AMT is not indexed for inflation, and

  while the tax cuts of 2001 - 2006 reduced regular income taxes, they did not reduce the AMT accordingly.

To address these issues, Congress has been legislating one-year patches that exempt many middle-class taxpayers from the AMT, including an estimated 26 million families for the 2009 tax year. But Congress has not yet passed a patch for 2010 or addressed the AMT on a longer-term basis. As a result, barring further action from Congress, the AMT will affect millions of additional taxpayers in 2010.

AMT Calculations, Exemption Amounts and Credits
The alternative minimum tax, or AMT, is a parallel tax system with different rates, deductions, exemptions, credits and calculations than those of its regular counterpart in the federal tax code.

Middle- and upper-income taxpayers―those with AMT incomes above the federal AMT exemption amount―calculate their federal income taxes under both sets of rules (traditional and AMT) and then pay the larger of the two tax amounts to the IRS.

AMT Exemption Amounts (assuming no new legislation in 2010)
Filing Status	2008	2009	2010
Single and head of household	$46,200	$46,700	$33,750
Married filing jointly and surviving spouse	$69,950	$70,950	$45,000
Married filing separately	$34,975	$35,475	$22,500
Child subject to kiddie tax	$6,400	$6,700	$5,200

These AMT exemptions phase out for higher-income taxpayers. For 2009, the phase-out begins with an AMT income of $150,000 for married couples filing joint returns, $112,500 for single persons and $75,000 for married couples filing separate returns. 

If you are or have been subject to the AMT, the tax rules provide for an AMT credit. Prior to 2007 the amount and application of the credit was highly restricted. Although you could carry the credit forward to future years to offset your regular (not AMT) tax liability, no part of the credit was refundable. As a result, you may still be carrying forward a nonrefundable AMT credit that you will never fully use. 

For tax years 2007 through 2012, Congress created a refundable AMT credit. If you meet certain conditions and income restrictions, you can claim a credit of up to 20 percent of the AMT credit amount―or $5,000, if larger―up to the amount of the unused credit. It's therefore possible to make use of the entire refundable credit over a five-year period.

Factors that Can Trigger AMT
Because income, deductions and credits are treated differently under regular and AMT rules, any of the following can increase the likelihood you'll owe AMT:

  exercising incentive stock options and holding the stock

  claiming a net operating loss deduction

  deducting depreciation using an accelerated method

  claiming a large number of personal and dependency exemptions

  taking the standard deduction

  deducting certain interest from a second mortgage

  receiving tax-exempt interest from private activity bonds (excluding those issued in 2009 or 2010)

  claiming large itemized deductions for medical expenses, state and local taxes, and/or miscellaneous expenses

  reporting certain income or losses from passive activities

  investing in oil and gas drilling partnerships

  claiming a foreign tax credit

Tax Planning for the AMT
AMT minimization strategies are complex and generally require a detailed analysis of income and deductions for more than a single tax year, as well as consideration of the impact of any AMT credits and/or refundable AMT credits.