Alternative minimum tax has expanded annually to include more and more taxpayers

As taxpayers dig out their receipts, tally their deductions and boot up their tax software this year, they may encounter an unpleasant surprise. It's called the alternative minimum tax.

Created in the 1960s as a way to keep the rich from being tax- free, the AMT has expanded annually to

Regular tax brackets, exemptions and standard deductions are adjusted annually for inflation, but the AMT brackets and exemptions are not, so many people who have seen their income grow with the economy are forced to pay the AMT each year.

It's affecting all professionals, said Jay Scheidlinger, a tax manager at Weiser LLP in Lake Success. The AMT was set up I don't know how many years ago, but now it's having unintended results. Everyone, including government, is aware that it's a big problem, and it's getting bigger each year - affecting people with lower and lower income.

The best way to understand the AMT is to think of it as a completely separate tax system with its own set of rates and rules for deductions, Scheidlinger said.

Taxpayers who think they might be subject to the AMT have to prepare their taxes under both systems and then pay the greater of the two taxes. Experts recommend preparing both sets of returns if your income is greater than $75,000 and if you have write-offs for personal exemptions, taxes (real estate or state income), dependents and home-equity loan interest.

Recent tax laws, too, have forced more people to pay the AMT. While last year's reduction of federal tax rates and capital gains taxes was viewed generally as beneficial to taxpayers, for example, it may have pushed many taxpayers into the AMT system because the AMT suddenly became the greater of the two tax bills.

It's going to be a big surprise, and it's only going to get worse, said Larry Lioz, a tax partner at Garden City-based Margolin, Winer & Evens. Congress is not ready to fix this because of all the money that's involved. Too much tax money is being collected to fix this, especially with the way the deficit is.

You don't have to be a very high wage earner. You could simply be a Long Islander with high real estate taxes.

To calculate their alternative minimum taxable income, taxpayers add back some tax deductions and income exclusions to their regular taxable income.

In high-tax regions such as Long Island, that means adding back deductions for sky-high real estate taxes and

state and local income taxes, said Alan Weiner, a tax partner at Melville-based Holtz Rubenstein & Co.

Taxpayers also have to add back any personal- and dependent- exemption deductions, and those who don't itemize their returns have to add back the standard deduction as well.

In addition, taxpayers lose any home-equity loan interest that was written off, unless the proceeds were used for home improvements.

For business owners and those who hold stakes in S-corporations or partnerships, there are several other add-ins and a few deductions that apply when calculating AMT.

After all of that, the taxpayer takes a standard AMT deduction - $58,000 for joint filers in 2004.

For couples with taxable income of more than $150,000, however, 25 cents, or one-quarter, of every dollar above $150,000 is used to reduce that $58,000 exemption.

A couple with $200,000 of taxable income, for example, can deduct only $45,500 instead of the standard $58,000. ($200,000 is $50,000 more than$150,000;.25 x $50,000 = $12,500; $58,000 - $12,500 = $45,500.)

After taking the deduction, the number left over is subject to AMT tax rates - 26 percent on the first $175,000 and 28 percent on the excess. Those brackets aren't adjusted for inflation either.

If the AMT exceeds your regular tax, you have to pay the greater amount.

Some really outrageous cases have grown out of the AMT system over the years, according to Scheidlinger.

There was one court case where someone had, like, 10 children, but his income wasn't especially high, he said. The only reason he was forced to pay the AMT was because it disallowed the deductions for his 10 kids.