Congress' tax changes likely to benefit filers, but will slow returns
Congress' tax changes likely to benefit filers, but will slow returns

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By Paula Burkes Erickson

Published: January 6, 2008

Congress late last month gave Christmas gifts — average $2,000 tax breaks — to about 21 million Americans.

That's how many more filers would have been caught in the snare of the alternative minimum tax (AMT) on their 2007 returns, had the House not voted 352-64 on Dec. 27 to approve a bill that patches it.

The alternative minimum tax was enacted in 1969 to ensure the then 155 richest Americans couldn't avoid paying some tax. It requires people with higher incomes and more tax deductions to give up certain deductions, including dependents, real estate taxes, and state and local income taxes. Today, about 4 million taxpayers are subject to the tax, including more and more middle-class families.

If not for the last-minute legislation, half of filers who earn $75,000 to $100,000 would have been affected, according to the Congressional Joint Committee on Taxation. Eighty-one percent with incomes of $100,000 to $200,000 would have.

Because of the AMT patch, taxpayers claiming certain related credits (child and dependent care, education, residential energy and mortgage interest) must wait to file taxes until Feb. 11, when the Internal Revenue Service completes the necessary reprogramming of its systems. Though 9.8 percent of taxpayers are affected, only historically early-filers, or 2.9 percent, will face delays, said David Stell, Oklahoma spokesman for the IRS.

AMT is triggered once income, after disallowing certain deductions, exceeds $66,250 for married taxpayers and $44,350 for singles. It forces people to calculate their tax twice — under the traditional tax system, and then using the 65-line Form 6251 for AMT. If the calculated minimum tax is higher than ordinary income tax, the excess must be added to whatever ordinary income tax is owed.

Edmond certified public accountant Mike Bell doesn't buy AMT's "unintended consequences,” a phrase used by many in Congress and the Treasury.

"Everything in the tax code relating to thresholds and brackets is indexed for inflation, so why not this?” Bell said.

Proponents argue the tax is a significant revenue source for the federal government. According to the Tax Policy Center, it would cost $85 billion to abolish the AMT, compared with $74 billion to repeal the regular income-tax structure.

Nichols Hills CPA Joshua Jenson thinks Congress should look into an alternative maximum tax.

"It's a triple hit to clients, say, who have $40,000 in itemized deductions and $9,000 aren't allowed,” Jenson said. As taxable income rises, deductions begin phasing out anyhow, he said.

Sixty percent of Jenson's clients are hit by AMT.

About 5 percent to10 percent of CPA David Greenwell's client base creeps into the tax each year. Items that tend to push clients into paying the AMT are high amounts of state and local tax deductions, miscellaneous itemized deductions, passive activity losses, exercise of incentive stock options, the sale of items with a lower AMT tax basis than for regular income tax purposes, and interest on a home equity loan not used to buy, build or improve homes, he said.

To get the latest AMT updates, the IRS urges taxpayers who file electronically to update their tax preparation software and the 16.5 million who last week received mailed tax packages to note the caution about the pending legislation, which passed after the forms were printed.

According to a survey conducted Dec. 18-20 for H&R Block, 52 percent of taxpayers were unaware Congress had been considering changes to AMT. Meanwhile, the tax patch only applies to 2007 returns, so similar legislation must be passed to avoid an increase in casualties next year.

The IRS ultimately needs to overhaul its tax structures, Mike Bell said and most observers agree.

"But just like Social Security, no one in Congress, or the executive branch, has shown the stomach for such politically volatile work,” Bell said.