Every now and then you might hear about the alternative minimum tax, or AMT, and how it is snaring more people each year, meaning more and more of us are trying to figure out how to avoid it. I'm here to define it, tell you why it might matter to you, and what you can do about it. I'm not an accountant, so it's possible I'll get something wrong, so don't take this as gospel. That said, I'll do my best to get it right. Here goes...

What is the Alternative Minimum Tax (AMT)?

The AMT was created to prevent rich people from avoiding taxes by using a bunch of crazy loopholes and tax shelters to make it look as though they actually had no income for the year. The AMT basically says "If you make over X dollars, you have to pay a minimum of X dollars, no matter how many outlandish deductions you can concoct." It's much more complicated than that, but that's the basic concept. In fact, it's so complicated that a lot of people don't know they owe this tax until the IRS comes after them.

I'm not rich. Why should I care about the AMT?

Good question. Well, the problem with the AMT is that it was created back in 1969 to target the rich people of that day. Well, you didn't need nearly as much money to be rich in 1969, right? Since then, however, inflation has changed the picture. In 1969, a $100,000 yearly income made you pretty wealthy; not so much anymore, especially if you live in a high-cost city like New York or San Francisco. But the law did not change to reflect the fact that inflation would cause many more people to be subject to the tax. Now you've got a lot of upper middle-class people doing their taxes without any larceny involved, no crazy deductions, but they're suddenly finding that they have to pay even more taxes than the general tax code would suggest.

How can I avoid the AMT?

I wish I had a good answer other than "make less money." There's been a lot of controversy in the past few years over the fact that so many people are being forced into the AMT zone (and many people who do their own taxes aren't even aware of it, causing more problems). So maybe the best thing to do is let your political representatives know of your displeasure. And if you happen to be one of those people that actually donates money to your local politicians, you should have an even easier time having your voice heard. Unfortunately that's how it works these days. Otherwise, you just have to console yourself with the fact that your increased earning power is providing greater capital for our wise leaders in Washington to use in making the world safe for democracy, or whatever they're doing there these days.

UPDATE: Hey, it's working already. Congress just passed a bill to give a whole bunch of AMT exemptions for 2007.

(Much love to rachelvoorhees for the above photo.)