Don't let the AMT catch you by surprise

According to the Congressional Research Service, 34

million taxpayers could be hit by the alternative

minimum tax (AMT) this year. Are you one of the many

unsuspecting or uninformed taxpayers who will be caught

by the AMT in 2012? With a better understanding of the

rules, you may be able to avoid or reduce adverse tax

consequences.

The AMT was set up in the 1960s to make sure wealthy

taxpayers didn't use deductions and exemptions to avoid

paying any income tax. The AMT applies a 26% or 28% tax

rate to income above a certain exempt amount. Because

this exempt amount is not indexed for inflation, the

AMT has begun to affect more and more middle-income

taxpayers each year.

The AMT is a separate tax calculation that parallels

the regular income tax, but it does not let you claim

personal or dependent exemptions, the standard

deduction, and certain itemized deductions. You compute

your tax liability under the regular tax system; then

you make the necessary adjustments for "tax preferences"

and calculate your tax under the AMT rules. You compare

your AMT liability to your regular tax liability and

pay whichever tax is greater.

It's wise to estimate your AMT exposure before year-end.

Depending on your situation, it may make sense to avoid

tax preference items or postpone certain deductions.

Strategies might include adjusting when you make tax

payments or charitable contributions, accelerating

income, or changing how you exercise stock options.