How to beat the AMT

Everyone complains that the Alternative Minimum Tax is snaring inappropriately an increasing portion of the upper middle class, and it is. But a recent Tax Notes item pointed to this piece from the IRS' Statistics of Income that shows that more and more high-income taxpayers—the ones theoretically the object of the AMT's affections—are wriggling free of its grasp. Looking at those with more than $200,000 in economic income (a slightly larger pool than those with more than $200K of AGI), the IRS finds that 10,680 of them paid no U.S. income tax at all in 2005, up from 5,028 in 2004 and 2,766 in 2000.

How do they do it?

For 44% of these taxpayers, the answer was substantial tax-free municipal bond income, which also avoids the AMT in most cases. Another 15.6% had enough charitable gifts to bring their tax liability down to zero. Surprising to me, for 15.9% it was the net casualty or theft loss deduction that eliminated income tax, while another 12.5% had extraordinary medical or dental costs that year.

If the AMT is missing the target by this much, why do we keep it?