When we hear about tax cuts we welcome the chance to pay less to the IRS. But, believe it or not, there may be a downside to these reductions. One potential pitfall is the alternative minimum tax, or AMT. Because of tax cuts, more taxpayers now face the possibility of having to pay the AMT.

So what is the AMT? Washington enacted the AMT to address the problem of wealthy individuals using tax breaks to reduce or eliminate their income taxes. The AMT calculation is designed to ensure these individuals pay taxes.

While it seems appropriate that we all pay our fair share, there are troublesome issues with the AMT. First, the calculations for figuring the AMT are complex, making it difficult to anticipate when you have to pay the tax. Second, the tax rates and exemptions for the regular income tax (your Form 1040) are indexed for inflation, but those for the AMT are not, causing more people to pay it. Additionally, an AMT exemption was designed to protect most average income taxpayers from the tax. However, as salaries have risen, this exemption is losing its effectiveness and each year more middle-class Americans must pay the AMT. The Tax Policy Center predicts that by 2010, the AMT could catch 37 percent of taxpayers with adjusted gross incomes (AGI) of $50,000 to $75,000 and about 73 percent of those with an AGI between $75,000 and $100,000.

The AMT calculation is separate from your regular income tax calculation. If you think your situation may trigger the AMT, you’ll need to complete IRS form 6251. Basically, when the tax you calculate on your Form 1040 is greater than on your Form 6251, you pay the amount from your Form 1040. However, when the amount on Form 6251 is greater than Form 1040, you must pay the amount from Form 1040 plus the AMT, which is the difference between the two.

Because the tax cuts reduced the amounts individuals calculate on their Forms 1040, they’ve increased the possibility that the Form 1040 will be smaller than the AMT calculation, making more taxpayers subject to the AMT. Your chances of paying the AMT increase if you have several children, interest deductions from second mortgages, interest from private activity bonds, large capital gains or high state and local taxes. Predicting whether you’ll face the AMT is difficult but you should discuss the possibility with your tax advisor.

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Jay Wittner, a member of Manasota Mensa, is a Financial Consultant and Accredited Asset Management Specialist with A. G Edwards & Sons, Inc., member SIPC. He can be reached at 941-747-6666 or jay.wittner@agedwards.com.