'Tax on a Tax' Slams Middle Class

Some days, Nina Doherty worries that the Internal Revenue Service is going to seize her house. She owes them over $100,000 because of the alternative minimum tax, known as the AMT.

"The IRS has sent me a letter more than once saying that they may put a lien on my house so that's certainly a possibility," Doherty said.

As a marketing executive for an Internet company, Doherty exercised stock options worth $400,000 in March 2000.

"As far as I was concerned, I had a great nest egg that I was going to watch, hopefully, grow, but I was in for a big surprise," she said.

That nest egg didn't grow. In fact, her company, Net2000, fell victim to the dot-com collapse, and went bankrupt. Doherty's stocks were suddenly worthless.

Her big surprise was the AMT. The IRS billed her for the original value of the stock.

"It didn't make sense to me that I could owe money on something I don't have. The asset that was involved was basically worthless and suddenly I had a tax bill that was for over $100,000," she said.

By 2010, the AMT may hit 35 million Americans — 1/3 of all taxpayers.

It was originally designed to eliminate tax shelters for the wealthy, but because of rising incomes and inflation, middle-class Americans are now feeling the pinch.

The AMT doesn't only affect people who had stock options. Some taxpayers with a lot of deductions or high state taxes are often singled out.

"Originally, it was put in as one of those envy pieces of legislation," said Grover Norquist, president of Americans for Tax Reform. "Some rich person out there isn't paying his fair share and so they stick this fix in."

"In point of fact, the way it's structured, it hits businesses that invest a lot, hits families with many children, it hits people who live in high tax states, high tax cities, people who have a lot of property taxes. If you're already hit with high property taxes and high income taxes, and you think you could deduct those, well the AMT comes in and takes a bite back away from you. You're actually paying a tax on a tax," he said.

Even the IRS wants the AMT repealed. The agency's National Taxpayer Advocate said in a report to Congress that the AMT "creates taxpayer confusion and anger because it catches taxpayers unaware."

Congress has introduced several bills to fix or repeal the AMT, but the legislation is going nowhere because, some say, it would simply cost the government too much. Over the next decade, the AMT is expected to rake in more than a half a trillion dollars for the U.S. Treasury.