More middle-class taxpayers feeling pain of AMT

By Eileen Alt Powell
Associated Press

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The strategy succeeded so well that today it's catching not only the wealthy but an increasing number of unsuspecting middle class families, leading some to call it the "stealth tax."

An estimated 2 million Americans paid the alternative tax last year, and the number is expected to increase to more than 3 million this year.

Those numbers may not seem so high, given that 130 million income tax returns are filed with the Internal Revenue Service each year. But according to studies by the nonprofit Tax Policy Center in Washington, D.C., if the law isn't changed, some 33 million households will be paying the AMT by the end of the decade.

"There's going to be a huge outcry over this eventually," said Karen Brosi, a tax expert with the California Society of Enrolled Agents. Enrolled agents are licensed by the government to assist consumers with their taxes.

The AMT is an extra tax some people have to pay on top of their regular income tax, especially those with high incomes who reduce their tax liability with a lot of deductions.

The way it works is that people first fill out their 1040 tax forms. Then they redo the calculations on the AMT Form 6251 — but without most of the exemptions and deductions that are allowed on the 1040. They pay whichever tax amount is higher.

More people are being caught up in the system because the standard exemptions and deductions have been adjusted regularly for inflation. The AMT system, meanwhile, has been tweaked only periodically.

Besides high income, other factors can throw taxpayers into AMT. These include having a large number of children or paying high local income and property taxes in states such as California, New York and Massachusetts. Exercising incentive stock options can ensnare others.

Brosi, the enrolled agent who practices in Palo Alto, Calif., said about one-third of her clients paid AMT taxes last year. This year she estimates about half will.

"What's insidious is that taxpayers can't control many of the triggers," Brosi said. "They have to pay state taxes. They can't get rid of their children."

She suggested that families with income of $75,000 to $100,000 and up should fill out the AMT form to determine whether they're liable for extra taxes.

Most professional tax preparers complete the form protectively, and some of the tax software programs do it automatically.

One taxpayer who got caught up in a financially devastating AMT battle is Ross Ashley, a 43-year-old computer software engineer from Dallas.

Ashley received stock options as part of his pay package with i2 Technologies Inc. In the spring of 2000, he exercised 4,000 options when the company's shares were trading at $110 each and held the shares in his brokerage account.

"Then the stock price started to dive" as the high-tech bubble burst, Ashley said. "By the end of the year, the stock price was about $35 a share and even if I had sold it all, it wouldn't have covered the AMT I owned."

That AMT bill — calculated on the value of the options when they were exercised — was $150,000, he said.

Ashley, who uses a wheelchair because of a neurological disorder, has been negotiating with the IRS since then over the taxes, which have grown with interest and late penalties to about $195,000.

"It's been a real strain on me and my family," said Ashley. He filed his return jointly with his wife Kathy, who works part time so she can care for Ashley and their 6-month-old son, Cole.

Ashley said he found support at www.reformAMT.org, a Web site run by a grassroots organization seeking legislative and legal reform of the AMT as it applies to stock options.

Jeffrey R. Hoops, president of the New York State Society of Certified Public Accountants, believes the AMT needs to be changed because it is perceived, especially by middle class taxpayers, to be unfair and because it has made tax compliance difficult.