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By Jason Stipp | 02-09-2012 03:00 PM

Managing Your Exposure to the Alternative Minimum Tax

Morningstar's director of personal finance explains who may be most susceptible to the AMT and what they can do to lessen the impact.

Jason Stipp: I'm Jason Stipp for Morningstar.

It's Tax-Wise Investing Week on Morningstar.com, and today we are talking about painkillers for those big tax headaches.

One of those headaches that may be increasingly afflicting investors is AMT. Here with me to offer some tips for managing AMT is Morningstar's Christine Benz, our director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Thanks for having me, Jason.

Stipp: So AMT is something that's increasingly afflicting a lot of investors, but I think above that, it's even just something that's difficult on its face to understand what it is. What is AMT, and why was it implemented?

Benz: Well, AMT stands for "alternative minimum tax," and it was originally instituted in the late '60s. The goal was to keep very wealthy taxpayers from using deductions and other loopholes to avoid paying taxes altogether. So, AMT is designed to ensure that people aren't able to skirt taxes.

Unfortunately, it has morphed into something that is probably not what it was originally intended to do, and has ensnared more and more middle-income taxpayers in recent years.

Stipp: So I know that Congress has tried to address this issue about the fact that it wasn't getting indexed [to inflation], but there are some changes in the way that that's happening in 2012, or some uncertainty anyway. What's the story this year with AMT?

Benz: Right. So year by year, Congress had been implementing what are called patches, essentially to keep new middle-income taxpayers from falling into the AMT. It has not acted yet for the 2012 tax year; Congress may act. But right now, there is a little bit of uncertainty. So it's possible that an even greater number of taxpayers will fall into the AMT zone for the 2012 tax year.

Stipp: So I know that the AMT is basically a different way of calculating taxes from the conventional way--that some people may have to pay if [the AMT calculation] actually shows the tax liability to be higher. But if I am worried about this or I think it could be an issue for me, how would I know? What are some qualities that might make me vulnerable to AMT?

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