The alternative minimum tax (AMT) was originally designed to ensure that wealthy taxpayers paid at least a minimum amount of income taxes. But more and more taxpayers are becoming subject to the AMT, with that number expected to grow from 1.7 million taxpayers in 2002 to 35 million by 2010 (Source: United States Department of Treasury, 2002).

And it's not just taxpayers with high incomes that can be subject to this tax. The following table shows the Treasury's estimates of what percentage of taxpayers will be subject to the AMT in 2001 and 2010, based on adjusted gross income (AGI) levels:

 

• Personal exemption deductions,
• The standard deduction if you don't itemize,
• State, local, and property tax deductions,
• Medical expenses, unless they exceed 10 percent, rather than 7.5 percent of AGI,
• Municipal interest income from certain private-activity bonds,
• Certain business-related items if you own a business, rental property, or interest in a partnership or S corporation, and
• The difference between the market price and exercise price of incentive stock options.

From this calculation, you subtract the 2009 AMT exemption amount of $70,950 for married taxpayers filing jointly and $46,700 for single taxpayers (up from $69,950 and $46,200 for 2008). However, the exemption is phased out by 25 cents for every dollar of AMT taxable income over $150,000 for married taxpayers filing jointly and $112,500 for single taxpayers (for 2008 and 2009).

The result is then subject to the AMT rates - 26 percent on the first $175,000 of income and 28 percent on amounts over that. If the AMT exceeds your regular income tax, the difference must be paid as the AMT. If you pay the AMT, some portion of that tax may be refunded in future years through an AMT credit that offsets your regular tax liability. However, the credit can only be used in years when you don't pay the AMT.

How can you plan for the AMT? Since so many items affect the AMT calculation, it's difficult to determine who will be subject to the tax. Taxpayers have found themselves subject to the tax because they have many children or live in states with high income taxes. Recently, many individuals who exercised stock options found themselves subject to the AMT, even if the stock's value went down after exercise. If you're concerned that you may be subject to the AMT, consider these strategies:

• Accelerate income and postpone deductions. This is just the opposite of the conventional advice of deferring income and accelerating deductions. But in years when you are subject to the AMT, you will typically pay less tax by postponing deductions (many of which are added back in the AMT calculation) and accelerating income (so income is taxed at a maximum rate of 28 percent instead of a maximum regular income tax rate of 35 percent). Income that could be accelerated includes selling investments at a gain, taking prepayments of bonuses, and withdrawing money from individual retirement accounts (IRAs) and other retirement plans.
  
   
• Plan stock option exercises carefully. For AMT purposes, the difference between your exercise price and the market price on the date of exercise is considered income, even if you don't sell the stock or the value decreases after exercise. You might want to exercise stock options early in the year. Then, near the end of the year, you can sell the stock if the price goes down so you won't be subject to the AMT on the option exercise.