Income tax is usually a topic people do not want to discuss. Everyone seems to have a better plan than the one currently in place, and they range from elaborate reform ideas to scrapping the current plan and starting fresh. To that end, Congress is working on a temporary patch to the Alternative Minimum Tax (AMT), promised to be in place by the end of the year.
The new bill needs to be in place by early November, or it may cause delays in processing tax returns and refunds for close to 50 million taxpayers on their 2007 taxes. The new suggestion is a one-year patch while will prevent the AMT from impacting nearly 21 million new taxpayers in 2007, taxpayers who were not the intended target of this tax in the first place. If this tax were to impact these individuals, it would result in a much larger tax bill.
There are two AMT’s that are part of the federal income tax system, one for individuals and one for corporations. Basically, the AMT does not allow as many deductions and exemptions as are allowed in computing normal tax liability. The AMT sets a minimum tax rate of either 26 or 28 percent on certain taxpayers so they cannot use specific deductions to lower their taxes. Typically, AMT affects the very wealthy. The taxpayers who this applies to are those who have items such as:
- Long-term capital gains
- Accelerated depreciation
- Certain medical expenses
- Certain tax-exempt income
- Personal exemptions
The AMT has increasingly become a topic of discussion as many more upper-middle class taxpayers have been finding themselves subject to this tax, the same tax which was meant to apply to the very wealthy.
For the individuals who may be affected by the current AMT, the average increase on their taxes would be $2,000, according to the Treasury Department. This patch would temporarily increase the income exemption needed for the AMT to apply and would also allow for specific personal credits normally disallowed when computing AMT applicability.
However, paying for AMT reform is a problem for both Democrats and Republicans. AMT is a large revenue producer for the federal government and implementing a patch will equal money that won’t be collected, a lack of revenue that could equal billions over the next 10 years.
In the next few days, the House Ways and Means Committee will review a bill that calls for a temporary AMT fix. It also calls for a one-year extension on more than 30 other tax breaks with a price tag that could top $70 billion.
One solution proposed to help with the costs of the AMT reform plan would require married couples who earn more than $200,000 to pay a “replacement” tax of four percent and for those who make more than $500,000, there would be a tax of 4.6 percent. The head of the House Ways and Means committee has also proposed closing several existing loopholes in tax laws, as well as limiting itemized deductions and personal exemptions for the wealthy.
Another problem could result in whether or not the internal revenue service will have time to include a note regarding the AMT reform on the 2007 tax forms. The IRS is slated to begin printing those forms soon.
The next few weeks will surely prove to be an interesting one as this bill is rehashed and tries to find its way to law, as well as the next year as income tax reform will surely be a point of contention for the presidential candidates.