Tax laws provide benefits for certain kinds of income and allow special deductions and credits for certain kinds of expenses. The alternative minimum tax (AMT) attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax.

The AMT is a separate tax formula that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less. If your taxable income for regular tax purposes, plus any adjustments and preference items, is more than the AMT exemption amount, you must calculate tax using both the AMT and regular tax formulas and pay the higher of the two amounts.

Today, the AMT is likely to hit many middle to upper-middle income taxpayers. Unlike the regular tax brackets, the AMT exemption amounts are not adjusted for inflation annually by the IRS. As a result, deductions that were introduced to cut the tax bills of people of more modest means have caused some families who claim these deductions to be subject to AMT rules. The following increase your risk of triggering the AMT:

Numerous dependency exemptions
Large state income tax deductions.
A large deduction for unreimbursed employee business expenses or miscellaneous expenses
Substantial medical expenses
Large capital gain
The exercising of Incentive Stock Options (ISOs)

Under the AMT, individuals are taxed at rates of 26% and 28% on the amount of taxable income above the exemption amounts. Under a provision of the American Recovery and Reinvestment Act of 2009, the AMT exemption amounts for 2009 have been raised to $46,700 for single filers and $70,950 for joint filers. Without further reform, the exemptions will drop to $33,750 for single filers and $45,000 for married couples filing jointly in 2010.

If the AMT system is not revised, it could impact your tax liability. Consult with us to determine if the AMT will affect you.