Because some taxpayers - particularly wealthy taxpayers - have been so successful in their efforts to legally minimize their tax bills, Congress came up with another way to tax them: the alternative minimum tax (AMT). The AMT provides a formula for computing tax that ignores certain preferential tax treatments and deductions that taxpayers would otherwise be entitled to claim.

So, many taxpayers are required to compute their income tax liability twice: once under the regular method and once again under the AMT method. An individual will be subject to the AMT if his or her AMT liability is more than the regular tax liability for the year.

Did You Know? In late 2008, Congress enacted a temporary patch relating to the AMT. For the 2008 tax year only, the AMT exemption amounts are $69,950 for married couples filing jointly and surviving spouses, $46,200 for single taxpayers and heads of households, and $34,975 for married couples filing separately. Also, taxpayers may use nonrefundable personal credits to offset AMT liability. Nonrefundable personal credits include the dependent care credit, the credit for the elderly and disabled, the credit for interest on certain home mortgages, the Hope credit for certain college expenses and the Lifetime Learning credit. Then, again, in early 2009, Congress enacted another temporary AMT patch relating to the 2009 tax year only, increasing the exemption amounts to $70,950 for married joint filers, $46,700 for singles, and $35,475 for marrieds filing separately, and continuing the right to offset nonrefundable personal credits against AMT liability. These AMT "patches" are designed to insulate middle-income taxpayers from the reach of the AMT, which was not originally enacted to tax anyone but some of the richest taxpayers. It was required because Congress has addressed the issue only on an annual basis. Without congressional action each year, middle-income taxpayers would be paying over $61 billion in additional income tax annually as a result of the AMT. The underlying problem is that the AMT is one of the few areas of the tax law that is not indexed for inflation.

What types of things can trigger the AMT? The most common items that can cause you to become subject to the AMT are listed below. These items must be added back to your taxable income in order to compute your AMT:

• all personal exemptions
• the standard deduction, if you claimed it
• itemized deductions for state and local income taxes, and real estate taxes
• itemized deductions for home equity loan interest (this does not include interest on a loan to buy, build, or improve your home)
• itemized deductions for miscellaneous deductions
• itemized deductions for any portion of medical expenses that exceed 7.5 percent of AGI but not 10 percent of AGI
• deductions you claimed for accelerated depreciation that exceed what you could have claimed under straight line depreciation (for property put into service in 1999 or later, this item will not apply to depreciable real estate, and it will generally apply only to 3, 5, 7, and 10-year property on which you claimed the ordinary MACRS depreciation)
• differences between gain or loss on the sale of property for AMT purposes and for regular tax purposes; these differences most commonly occur as a result of the different depreciation methods required under AMT, as described above
• changes in income from installment sales, since the installment sale method generally can't be used for AMT purposes
• changes in certain passive activity loss deductions
• deductions relating to oil and gas investments, or drilling or mining operations
• interest on certain private activity bonds that would otherwise be tax-exempt

If you have large amounts of any items in this list, and your adjusted gross income exceeds the exemption amounts discussed below, you (or your accountant) should compute your AMT liability on IRS Form 6251, Alternative Minimum Tax - Individuals, to determine whether you must actually pay any AMT.

In an additional twist to this very complicated area, there is a tax provision that gives taxpayers back what the AMT otherwise takes away. Through the end of 2009, taxpayers may use nonrefundable personal credits to offset AMT liability. Nonrefundable personal credits include the dependent care credit, the credit for the elderly and disabled, the credit for interest on certain home mortgages, the Hope credit for certain college expenses and the Lifetime Learning credit.

Among the Business Tools are Form 1040 and Form 6251. They are in Adobe Portable Document Format (.pdf), and you will need the free Acrobat Reader to view and print the file.

AMT rates and exemptions. The AMT method does provide each taxpayer with a flat dollar amount that is completely exempt from tax. The dollar amount of your exemption depends on your filing status. For 2008, the exemption amounts are $69,950 for marrieds filing jointly and surviving spouses; $46,200 for singles and heads of households; and $34,975 for marrieds filing separately. (In 2009, these amounts are increased to $70,950, $46,700, and $35,475, respectively.) Although the AMT exemption amounts for individuals are increased for 2008, the threshold levels for the calculation of the phase-out remain unchanged.

In 2008, the available AMT exemption amounts are reduced by 25 percent of the amount by which an individual's taxable income for AMT purposes (called AMTI) exceeds: $150,000 for joint filers and surviving spouses; $112,500 for single taxpayers; and $75,000 for a married couple filing separate returns. The AMT exemption amounts are eliminated entirely if AMTI exceeds: $415,000 for joint filers; $289,900 for single individuals and heads of households; and $207,500 for married taxpayers filing separately.

Work Smart There's no doubt about it - the AMT can play havoc with your tax planning. If your AMT liability and your regular tax liability tend to be approximately equal from year to year, your best bet is to maintain this stability. If your deductions are not so evenly spaced and you tend to have great fluctuations in income from year to year, you may be able to shift some AMT-triggering items from an AMT year to a non-AMT year, so as to reduce your liability in a non-AMT year almost to the point at which you would become subject to the AMT. Your tax professional can tell you whether this might be possible in your individual situation.

Credit for prior year's minimum tax. If you paid AMT last year, or you had a minimum tax credit carryforward from last year, you may be able to claim a tax credit for it.