Jim Kofron filed his taxes in 1995 the way he always had — completing them by hand, taking deductions and credits for each of his seven children.

        But then the IRS told him he couldn't.

        He remembers thinking: “The Alternative Minimum Tax, what's that?”

The Kofron family of West Chester ends up paying more than they expected to the government every year because of the Alternative Minimum Tax. Behind dad Jim, eight of their 10 children, from left, are Jacob, 13, Teddy, 9, Henry, 4, Marnie, 15, Lexi, 2, Izzy, 5, Jordan, 17, and Finn, 8 months, who is held by their mother, Alison. (Michael Snyder photo) | ZOOM |

        For the government, it's a way to keep people from exploiting too many tax loopholes. You pay regular tax or AMT — whichever is more.

        For the Kofrons, the AMT meant paying $500 more that year than they expected to. Six years and three more children later, Jim and Alison Kofron expect to pay about $3,000 more under AMT rules this year than they would under standard tax rules.

        That's because the AMT allows fewer deductions and no personal exemptions. Of the Kofrons' 10 children, they get full child credits for only six under AMT rules.

        But the AMT wasn't designed for them. It was designed 30 years ago to affect wealthy Americans with so many deductions — such as business and investment expenses — that they could effectively deduct their way out of paying income tax. For example, there were 155 individual income returns in 1967 with adjusted gross income above $200,000 on which no federal income taxes were paid.

        The Kofrons aren't wealthy, falling into the 28 percent tax bracket that covers up to $105,950 in taxable income for joint filers. And their only deductions would be a modest mortgage — and nine children. (The oldest, Bethany, is married and no longer claimed as a dependent.)

        They are among the thousands of AMT-payers each year whom the alternate levy was never intended to snag. And their numbers are growing at a faster pace than ever.

        A U.S. Treasury Department study found that the number of AMT payers will double in two years, from 1.3 million in 2000 to 3 million in 2002. Growing at an average of 30 percent a year, those numbers are expected to reach 17 million by 2010.

        The cause: A basic design flaw in the AMT.

        “The reason people are subject to the Alternative Minimum Tax is because their AMT liability exceeds their regular tax liability,” said Robert Rebelein, assistant professor of economics at University of Cincinnati and co-author of the U.S. Treasury Department study.

        Regular income tax liabilities don't grow as fast as AMT liabilities because regular income tax brackets and exemptions are indexed for inflation; the AMT structure is not.

        Proposed tax cuts — which will lower Americans' regular liability even further through lower rates and increased credits — threaten to make even more people pay the AMT than already projected.

        Dr. Rebelein's study found that by 2010, more than half of families with three or more children will be subject to the AMT and half of all heads of household (the filing status for single parents) with incomes greater than $50,000 will pay the AMT.

        But the confusing aspect for people like Jim Kofron is that they rarely know what the AMT is, let alone how to figure it and which to pay.

        So how do you know whether you have to pay the tax? Follow the instructions for line 41 of the 1040 form. In addition, if you meet any of the criteria listed on Page 33 of the directions, you'll have to file Form 6251 Alternative Minimum Tax — Individuals.

        Here's how to calculate the AMT:

        You begin with taxable income computed under the regular income tax system. Then you add back to the taxable income many of the important deductions you claimed to arrive at regular taxable income.

        For example, state and local income tax, property taxes, miscellaneous itemized deductions and personal exemptions all may need to be added back.

        Depending on the types of investments you have, there could be other adjustments. For example, certain tax breaks for incentive stock options aren't allowed under the AMT.

        After adjustments, you subtract an AMT exemption amount that varies with your income. What remains is taxed at the AMT tax rates of 26 percent or 28 percent to arrive at a “tentative minimum tax.”

        The first $175,000 of income under the AMT is taxed at 26 percent, and amounts above that are taxed at 28 percent.

        You fall into the AMT if the amount you would pay under the regular tax system is lower than what you would pay under the AMT. You must pay the excess as AMT. For example, if your regular tax bill is $25,000 and your “tentative minimum tax” is $32,000, you would pay the regular tax bill plus AMT of $7,000 (That's $32,000 minus $25,000).

        “It's a horrendous calculation,” said J. Richard Joyner, a partner in personal financial counseling at Ernst & Young in Dallas. “It is a total nightmare, and if more people end up owing it, it will cause a lot of problems.”

        Mr. Kofron has tackled that problem by using TurboTax, a software program that calculates everything for him. He's only just started preparing his 2000 taxes, but so far estimates he'll pay about $12,575 in Alternative Minimum Tax — about $3,132 more than under standard rules.

        But it's not a difference he whines about.

        “We never had children to have deductions,” he said. “We're not off complaining about it — we were just caught by surprise.”
       The Dallas Morning News contributed.

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