I’m in the middle of preparing my taxes now. (Well… preparing an packet for my accountant at any rate.) And it struck me that I have no idea if I’ll be subject to alternative minimum tax this year. None.

I decided to do a post on this because I came across this ridiculous story that emphasizes how alternative minimum tax is broken. It’s about a couple that lost most of their retirement savings when tech stocks collapsed in 2001. They also owe AMT on “income” that never existed because they never sold the stocks. Now the IRS wants the phantom AMT money and, since they haven’t been able to pay, more than twice that in fees and penalties.

Their story isn’t unique:

“I know, personally, dozens of people who have lost their homes” over AMT stock-option taxes, says Tim Carlson, president of the Coalition for Tax Fairness, a lobbying group organized to seek relief for people like the Millers. There have been at least two suicides, a coalition spokesman says. “The people that are affected by [AMT] are your hardworking, salt-of-the-earth Americans who always pay their tax and who are impeccably honest.”

In 2006, the IRS’s national taxpayer advocate’s report highlighted the AMT as the single most serious problem with the tax code. The AMT punishes taxpayers for having children or living in a high-tax state, and that worst part is that the AMT is so complex that most taxpayers who owe it don’t realize they owe it until they are finished preparing their returns.

The AMT is not indexed to inflation, so an increasing number of middle-income taxpayers are subject to the higher tax, which had originally only been intended to apply to the ultra-rich. By 2010, one in five people will be subject to it. And as we enter a period of time that may see the inflation rate rising, I wouldn’t be surprised to see that number end up higher.