These days there is a lot of talk about making the rich pay more taxes and giving a tax break to the middle class. The Obama Administration has made no secret of their intention to raise taxes for the richest 2% of Americans. The accompanying message is that everyone making under $250k will not see a tax increase. This idea of taxing the rich and protecting the middle class has been around for many years. Back in 1969, a new tax code was introduced aimed at forcing 155 high-income households to pay their fair share of taxes. This new code was called the Alternative Minimum Tax. Why do you care about the Alternative Minimum Tax? Well, you may be at risk of paying penalties and interest because of it without even knowing. I’ll get to how that can happen. First let’s discuss how a change aimed at 155 rich people can grow into something that you actually have to worry about.

The Alternative Minimum Tax was created because these 155 households were able to use so many tax benefits that they would not owe hardly any taxes. The answer was to charge them an almost “flat” tax of 26% to 28%. Over the years many changes happened to the Alternative Minimum Tax. It is really its own tax code. It has its own deductions and benefits. However, since the basic reason for the Alternative Minimum Tax is to charge more taxes, you do not want to qualify for it.

Over the years, inflation has changed the value of the dollar. We won’t go into too much detail about inflation, but it is sufficient to say that since 1969, the price of just about everything has gone up. It takes more dollars today to buy a loaf of bread than it did back then. As inflation rises, so do salaries. Tax brackets, exemptions and standard deductions also get adjusted for inflation. Can you guess one thing that is not adjusted for inflation? That’s right boys and girls. The Alternative Minimum Tax is not indexed for inflation. This means that the definition of “rich” will change over the years. Had this tax code been around since the thirties, this problem would have already been solved, hopefully. But it seems that we are the ones who need to feel the pain in order to bring on change. Your job is to understand the problem and minimize your pain. Nobody wants to pay penalties and interest to the IRS for a problem they had no idea about. To complicate the problem, you may file your taxes like normal and not find out until you are audited that you should have filed using the Alternative Minimum Tax. There is nothing like being a good citizen, paying your taxes and getting penalized anyway.

So the question on your mind probably relates to the range of income that would put you at risk. A quote by the Congressional Budget Office stated that in 2010, if no changes are made, one in five taxpayers, and nearly every married couple making between $100k and $500k, would owe the Alternative Minimum Tax. The current suggestions are that if your household makes over $75k per year that you should perform the proper due-diligence and ensure that you do not owe the Alternative Minimum Tax. Many factors put you at higher risk including owning a business, having interest on a home-equity loan and having stock options that you exercised. You may not hear of a problem until an audit results in penalties and interest. To avoid this, I strongly urge you to do your homework if you feel you may be at risk.

Of course, the tools I endorse such as TurboTax or TaxAct tell you before filing whether you qualify for the Alternative Minimum Tax. These types of benefits are the beauty of having a quality system doing the real work for you. If you would like to explore more details about the benefits of these tools visit our site at www.incometaxes1040.com. Protect yourself from common tax errors to prevent bigger problems down the road. It saves you time, stress and money.