Saturday, November 3, 2007

Alternative Minimum Tax Deadline Looming for Legislators

by Nancy Osborne, COO of ERATE


Lawmakers in Washington are scheduled to adjourn on November 16th and if they don't act by then an ever increasing number of taxpayers, about 25 million to be precise, are going to be hit with the so-called "wealth tax" also know as the alternative minimum tax or AMT. The vast majority of taxpayers that will be impacted in 2007 are going to be introduced to the AMT for the very first time and it will not be a pleasant introduction as the effected taxpayers will pay on average an additional $2,000 in income tax resulting from the AMT. To make matters worse, if congress fails to act fast enough, 25-50 million taxpayers could face a delay in the processing of their federal tax returns and consequently a delay in receiving their refunds.

The Internal Revenue Service (or IRS) needs at least 12 weeks to process any changes made to the alternative minimum tax (or AMT) from the time that new legislation is passed into law. The re-programming that is involved within the IRS computer system requires millions of lines of coding which cannot be implemented over night and will require time for testing as well. Unfortunately the AMT is an integral part of the IRS processing system and much time will be needed to alter it. Therefore should congress delay until December in making any AMT changes, the IRS would not be able to process some 25 to 50 million returns until the mid-March time frame at the earliest. Of course the deadline to file a return is not until April 15th however those taxpayers anticipating a refund tend to file their returns far ahead of that deadline and for the 2006 tax year, the average refund amounted to approximately $2,260. The IRS is scheduled to send its 1040 instruction forms to be printed on November 7th and the agency should be ready to begin processing 2007 tax returns by mid-January.

Unfortunately policy watchdogs and Washington insiders predict that major AMT reform legislation will not occur prior to 2009 and therefore would not go into effect until 2010 at the earliest. The best alternative for taxpayers would be if lawmakers were to pass a "patch" for 2007 which would prevent taxpayers with income levels at $45,000 (for joint filers) and $33,750 (for single filers) from being affected by the AMT this year. A patch was successfully implemented in 2006 which effectively raised the AMT exemption levels to $62,550 (for joint filers) and $42,250 (for single filers). The uncertainty surrounding the current AMT status has professional tax payers ready to pull their hair out as they have no way of currently determining which of their clients will be impacted.

The alternative minimum tax (AMT) was originally conceived 40 years ago to prevent a small number of high wealth individuals from eluding taxes altogether, a flaw in the tax system at the time actually allowed this to occur. The problem with the AMT system today is that it has not been indexed to the median income levels within the various geographic regions throughout the United States. Therefore the AMT tends to hit the residents of expensive coastal and urban areas disproportionately to the rest of the country. There is of course strong taxpayer support for correcting the inequities within the AMT system however the political support to do so is now limited to solutions which are revenue-neutral and will replace the $500 billion to $1 trillion in revenue that is expected to be generated from the AMT over the next decade. This is where the catch-22 arises as there is no agreement amongst legislators on how to replace the AMT generated revenues and there are now other looming political crisis's taking the spotlight away from AMT reform, such as the recent sub-prime mortgage debacle.

Beware of the potential impact of the AMT on you and your family if:

> You have a combined household income is in excess of $100,000.

> You take multiple itemized deductions, exemptions or credits which may not be permitted under the AMT system.

> You don't itemize your deductions. AMT does not allow the standard deduction.

> You have dependents or children. Personal and dependent exemptions are not permitted under the AMT system.

> You are a resident of a high income tax state. Even state, local and property taxes are not deductible under the stringent AMT system.

> You receive income from municipal bonds which is not subject to standard income tax but is subject to the AMT.

> Exercising stock options (or ISOs) is a large and notorious trigger for the AMT to come into play.

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