Clean Patch for AMT Clears Senate

By John L. Duoba, Toolkit Staff Writer, and Jeff Carlson, Washington Staff Writer

The Alternative Minimum Tax is supposed to target wealthy taxpayers with lots of deductions, to make sure they were "paying their fair share" of taxes and not "writing it off." But a quirk in the AMT law now threatens to subject 23 million middle-class taxpayers to the AMT in 2007, meaning an average tax increase of $2,000 for the affected taxpayers (only 4 million paid AMT in 2006). Lawmakers on all sides agree that it shouldn't happen--the tax was never intended to overcharge these taxpayers.

So a simple tax law change by Congress could fix the AMT and prevent this overcharge from taking place. Except in this Congress, nothing is ever simple.

Aware of the need for legislation months ago, congressional leaders decided to play politics with the fix to try to gain an upper hand on political opponents. In the meantime, many deadlines have passed as battle lines are drawn over how to fix the AMT. In fact, the IRS now says that tax refunds early in the tax filing season will be delayed because of the legislative inaction.

The main sticking point is how to structure the AMT tax relief. Democrats insist other taxes must be raised to offset the AMT patch; Republicans counter that other taxes shouldn't be raised to make up for an AMT overcharge that never should be collected in the first place. In addition, President George W. Bush has repeatedly said he will veto any legislation that raises new taxes.

Given the current political realities, there was only one way this congressional showdown could play out. An offset AMT bill (even if approved) would be vetoed and there wouldn't be enough support to override the veto. So the only other option would be to pass a clean AMT bill with no offsets; a bill extending certain expiring tax provisions also needs congressional approval, and many believe the partisan horse-trading over offsetting those tax breaks could be a vehicle for compromise.

This has been the situation on Capitol Hill going back to October, yet only on December 6, 2007, did Congress take the first steps toward resolving this issue and getting the upcoming income tax filing season back on track.

A bipartisan Senate on December 6 overwhelmingly approved 88-5 a one-year patch for the AMT without offsets, but not until after Senate Republicans rejected Democratic leaders efforts to consider a House version of AMT relief that was fully offset by new taxes. The Senate cloture motion on the House bill fell by a 46-48 margin--14 votes shy of the necessary 60 votes to proceed with the bill.

Following the failed cloture vote, Senate Majority Leader Harry Reid (D-Nev.) offered to hold a unanimous consent vote on a one-year AMT patch without offsets, and without addressing expiring tax provisions commonly referred to as "extenders." However, Senate Budget Committee ranking member Judd Gregg (R-NH) objected, wanting to address the expiring tax provisions as part of the same tax bill to clear up questions about the upcoming tax filing season. In the end, a formal vote on just a clean AMT patch without extenders followed.

Regarding the extenders package, Senate Finance Committee ranking member Charles E. Grassley (R-Iowa) later said on the Senate floor that they would have to defer any action until 2008. About 35 tax provisions are set to expire, including the R&D credit, deduction for sales taxes, and breaks for teachers' expenses.

The House of Representatives must now approve the Senate version of the AMT bill before President Bush can sign it into law. But passage in that chamber is by no means assured.

House Ways and Means Committee Chairman Charles B. Rangel (D-NY) reiterated House Democrats intention to offset the measure. "We had hoped the Senate would support House-passed legislation to provide AMT relief without adding to the deficit," said Rangel in a statement following the Senate vote. "As I outlined earlier today, I am drafting amendments to the legislation passed by the Senate tonight to address the political opposition in their body. The House will consider these amendments so that we may give the Senate another chance to do the right thing and pass responsible AMT relief."

Stay tuned.

Related items:

Delayed Start to 2008 Filing Season Could Mean Numerous Problems for IRS, Taxpayers

No Changes Anticipated in Tax Extenders Package

House Approves One-Year AMT Patch Legislation

Congress Begins Work on Temporary AMT Patch, Extenders Bill

Year-End Tax Planning Must Deal with Uncertainty

Tax Rate Projections for 2008

Senate Finance Panel Hears Solutions for AMT Problem

IRS Begins Tax Season With Important Issues Unresolved

Permanent AMT Fix Poses Difficult Choices

Posted December 11, 2007.