Beware the Stealth Tax / How to minimize the damage of the alternative minimum tax.

Laura Saunders for the Wall St Journal writes: Lee Linton never dreamed he would owe the alternative minimum tax, a levy first imposed nearly 50 years ago to keep the wealthy from overusing tax breaks.

"I thought the AMT was for people with stock options or fancy tax moves," says the 55-year-old utility engineer, who lives in Crystal River, Fla. "But I'm single and take the standard deduction."

Yet when Mr. Linton recently figured his 2013 taxes, he owed $3,000 of AMT on top of his regular tax bill—probably because he took $90,000 of capital gains last year in rearranging his portfolio for retirement. He says his marginal tax rate on the sale topped 27%, nearly double the 15% rate he expected to pay on his long-term capital gains.

"If I had seen it coming, I would have spread the sale over two years," Mr. Linton says. Now he is warning friends that "the AMT isn't just a tax for the 1%."

Indeed it isn't. According to estimates by the Tax Policy Center, a nonpartisan research group in Washington, the alternative minimum tax will raise about $26 billion from four million taxpayers in 2013, nearly two-thirds of them with incomes between $200,000 and $500,000 (see chart on this page).

The average AMT paid by those subject to it was $7,212 in 2011, according to the most recent data from the Internal Revenue Service.

The levy these taxpayers face is one that National Taxpayer Advocate Nina Olson calls "a Rube Goldberg contraption of unnecessary complexity." In essence, it is a flat tax that rescinds valuable benefits, such as deductions and exemptions, and eliminates the benefit of lower brackets in the regular tax.

Taxpayers have to figure their tax under both the AMT and regular systems and, if the AMT exceeds the regular tax, pay the excess amount.

Years ago, say experts, the AMT was typically owed by wealthy investors or executives who had benefited from breaks for incentive stock options, accelerated depreciation on assets, intangible drilling costs and the like.

But not now. Lawmakers enacted adjustments that prevented 28 million new taxpayers from owing AMT for 2013 in last year's fiscal-cliff legislation. But they didn't undo the effects of many earlier years of inflation that still pulls in many others, says Roberton Williams, a Tax Policy Center expert.

As a result, the AMT now applies to eight times as many taxpayers as it did 20 years ago, and common AMT "triggers" often are less esoteric than in the past. "They can be as simple as having three or more children, taking a large capital gain, or—especially—deducting state and local taxes," says Dave Kautter, managing director at American University's Kogod Tax Center, who studies the AMT.

Some taxpayers, like Mr. Linton, are blindsided by the AMT because of this expansion. Others don't see it coming because the levy's impact is unpredictable, the result of odd interactions between two utterly different systems......SNIP....The Article Continues @ at the Wall St Journal. To read the rest of the article Click Here.