As I was finishing my federal tax return on the computer in April, I got a nasty surprise. A message popped up on the screen: “Based on the information we’ve gathered so far, you may be subject to the alternative minimum tax.”

Who? Me? Isn’t that for rich people?

Not anymore. The AMT was created in 1969 to ensure that rich taxpayers couldn’t use tricky accounting to pay less than their share. But the new AMT victims are not rich – they’re just victims of wage inflation. They’re people who haven’t a prayer of retiring before 65 or 70, are sweating to put money aside for children’s college expenses and feel chained to their jobs for the health insurance.

More people paying more

About 3.8 million taxpayers paid the AMT for the 2004 tax year – you’ve probably heard some grousing about it at the water cooler as I have. The IRS estimates they paid an average of $6,000 more than under the usual tax calculations.

Government experts say about 20 million taxpayers will be forced to pay AMT in 2006 and perhaps 35 million in 2010 – about 35 percent of all individual taxpayers. There’s no easy way to duck the AMT if you fall in its crosshairs.

And there’s not much encouraging news. President Bush has ordered a panel to suggest AMT reform by July 31, and a bipartisan bill to repeal the AMT is to be introduced soon.

But the AMT is expected to give the government a $600 billion windfall over the next 10 years. With federal budget deficits growing to an appalling size, it’s hard to imagine Washington will give up this sneaky, backdoor tax increase. Indeed, President Bush’s deficit-reduction plan assumes no reduction in the AMT.

The high cost of inflation

Why are so many more taxpayers being hit with this tax?

Inflation. Although Americans’ incomes gradually go up, the AMT thresholds are not automatically adjusted, or “indexed” to follow suit. So every year, more people cross the line.

A married couple filing a joint return is likely to be subject to the AMT if annual income exceeds $58,000 – or $45,000 after a temporary adjustment expires this year. In 1969, the AMT was set up to affect taxpayers with annual incomes of more than $30,000. Had it been indexed to inflation, the threshold would be $153,500 today, according to the IRS.

The AMT uses rules different from the ordinary income tax. Once you’re subject to the AMT, you don’t get many of the deductions ordinary taxpayers do and you’re taxed at higher rates.

Also, people with big enough incomes can trigger the AMT if, on their ordinary returns, they deduct things such as state and local taxes, mortgage interest on second homes and medical expenses. People can also trigger AMT by exercising incentive stock options and reporting long-term capital gains on investments.

Taxpayers possibly subject to the AMT are expected to figure both taxes and pay the larger amount. Because of the Bush income-tax cuts, many middle-income people now find that the AMT bill is bigger than the income tax. Hence, what taxpayers saved through income-tax cuts they lost through the AMT.

Deficit reducer

Clearly, the AMT is hitting people who were not its intended targets, so it’s easy to say the tax should be repealed or its income thresholds raised.

But the federal budget deficit is a serious problem as well, and it’s not likely to be solved by spending cuts alone. So a tax cut that makes the deficit bigger probably wouldn’t be in the country’s long-term interest.

The sensible approach would be to revamp the whole tax system. Perhaps a tax-revenue loss from repealing the AMT could be offset by rolling back the various Bush tax cuts that were so generous to the well-to-do. But what are the chances of that? Pretty slim.

There’s another possibility: doing nothing. Most of the Bush tax cuts are set to expire after 2010 unless some action is taken to extend them. Perhaps if income taxes were allowed to go back up, there’d be more room to adjust the AMT.

Policy change through inaction seems like a lousy way to run a government. But given the tax-policy paralysis in Washington, maybe that’s the best we can hope for. If I had to bet, I’d say the AMT will be with us for a long time.

Jeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at [email protected].