01:00 AM EDT on Sunday, April 10, 2005

If you still haven't finished your federal income-tax return, don't forget to also calculate your alternative minimum tax. And don't be surprised if you owe more in tax as a result.

Every taxpayer is supposed to calculate his or her tax under two separate sets of rules: one based on rules that govern the regular income tax system, the other under rules that govern the AMT. (See Line 44 of the U.S. Form 1040.)

And keep in mind that the Internal Revenue Service will do its own AMT calculations on your return, just in case, said Gregory A. Porcaro, president of the Rhode Island Society of Certified Public Accountants.

"They run their own AMT calculation" on each return, to see if a taxpayer should be paying the AMT, Porcaro said in an interview at Otrando, Porcaro, Pascarella & Gill Ltd., a CPA firm in Warwick, where he is tax partner. "If that tax is higher than your regular tax, you have to pay that tax," he said.

Why might your tax be higher? Because the AMT rules aren't as forgiving -- they wipe out the benefits of certain deductions you claim under the regular tax rules, said Mark M. Higgins in an interview at the University of Rhode Island in Kingston, where he is a professor of accounting.

If you have a home-equity loan, for instance, you generally can deduct all the interest under the regular tax system. But the AMT generally allows the deduction only if you use the loan to improve your residence, he said.

"So if you used [the loan] to buy a car or finance a trip or pay off credit card debt, it's not deductible for AMT" purposes, Higgins said.

The AMT system doesn't let you claim personal exemptions, either, or certain types of miscellaneous itemized deductions, including unreimbursed employee business expenses, such as business meals and entertainment, union dues, professional dues and subscriptions to professional journals, U.S. Treasury regulations say.

The AMT also doesn't let you claim a deduction for state and local income and property taxes. "As a result, people in high-tax jurisdictions are more likely to have AMT liability than their counterparts in low-tax areas," according to a report by the Congressional Budget Office.

Fewer deductions for AMT purposes means higher taxable income -- and higher tax, Higgins said.

More than 10,600 federal returns filed from Rhode Island last year showed an alternative minimum tax liability, as did more than 89,000 returns from Massachusetts and more than 60,800 from Connecticut, according to IRS figures published earlier this year.

National Taxpayer Advocate Nina E. Olson has projected that, for the 2005 tax year, the AMT will affect about 12.7 million taxpayers nationwide, up from about 2.4 million in 2003.

That's not the only problem with the AMT, she said. "It is often very difficult for taxpayers to determine in advance whether they will be hit by the AMT. As a result, many taxpayers are unaware that the AMT applies to them until they receive a notice from the IRS, and some discover they have AMT liabilities that they did not anticipate and cannot pay," Olson said in her most recent report to Congress.

The average taxpayer subject to AMT (typically middle-income and higher-income taxpayers) will owe an additional $6,000 in tax for the 2004 tax year, Olson said in her report.

She offered two examples of the AMT's impact, and both show you needn't be rich to trigger the tax:

A mother of five earned $55,000 in 2003. She was separated from her husband during the latter half of the year and thus filed her return as "married filing separately." Because she claimed the child tax credit, she had no tax liability under the regular tax rules. She therefore did not have any tax withheld from her paychecks.

When she prepared her tax return, however, she found that she had a tax liability of $1,760, because of the AMT. And as a result, she also owed a penalty -- for failure to pay estimated tax.

A taxpayer filed a joint return claiming two exemptions for 2003. He had an adjusted gross income of $185,000 and paid state income and property taxes totaling $27,000. He had 90 percent of his regular tax liability withheld from his paycheck.

When he prepared his return, though, he found he had an additional tax liability of $3,908, because of the AMT. (And he, too, owed a penalty.)

In her 2003 report to Congress, Olson named the AMT as the most serious problem facing individual taxpayers. In her most recent report, issued in January, she again urged Congress to repeal the AMT.

But Congress has so far resisted, and money may be a reason: The Congressional Budget Office has estimated that repeal would reduce federal tax revenues by $600 billion over the next 10 years.

TODAY'S TIP: The President's Advisory Panel on Federal Tax Reform wants to hear from you.

Earlier this year, the panel invited public comment about the complexities and burdens of the federal tax system. Now the panel seeks proposals for reform. Submissions must be made by April 29. For guidelines, see the panel's Web site:

www.taxreformpanel.gov

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline [at] projo.com

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