ALTERNATIVE MINIMUM TAX
This "flat" tax was enacted to make people who use a lot of deductions- particularly tax shelters- to pay at least a certain amount of tax. But the limits have not been adjusted by inflation and therefore a lot more "regular" taxpayers may find themselves in a tax bind. When you add in the recent non refundable child and tuition credits, two preference items not allowed under the current AMT, you might see the problem. Only 414,000 taxpayers paid the AMT in 1995, according to the IRS.
But according to the Congressional Joint Committee on Taxation, that number could grow to 6.2 million by 2005, assuming inflation at 3% annually. The JCT estimates that by 2005 a family of four with an income of $58,300 in 1996 dollars will be subject to the AMT.
And if you fall into that trap, you can kiss off your personal property tax deductions, your state and local tax deductions, and the deductibility of interest on a home equity line of credit and apply a flat 26% rate on your taxable income up to $175,000 (28 percent over $175,000) with only one $45,000 exemption ($33,750 for single taxpayers).