Live from the Nuke Free Zone

(This post was written by Salinn, longtime reader and tax professional, who has been a great source for several topics here on the NFZ. Editing is minimal. — William)

So let me tell you a little story.

Back in 1969, Congress identified 155 households making bunches of money, tax-free, who were managing to avoid taxes. They passed some legislation called the Alternative Minimum Tax (AMT) that forced these households to pay at least a minimum tax payment in order to be fair.

The system that we have currently in place is a graduated, voluntary tax - The AMT is a flat, minimum tax. Basically, if you make a certain amount of money, then you figure your regular tax, then you recalculate your tax based on the AMT amount which takes away many of your deductions and voila - if your regular tax isn’t at least that much, then you get an added AMT amount.

No big deal, the AMT doesn’t come in to play for hardly anybody, right? Sure, in the 70’s and 80’s. It was mostly an ignored tax. My father has been doing taxes since 1976 and back then you just didn’t get anyone that fell into the AMT tax at all. It’s just this parallel tax system that hangs out and makes sure that everyone gets hit with some sort of tax, but has a large exemption amount so it doesn’t hit people making the average wage.

Fast forward 30 years. Tax brackets have been adjusted for inflation, but the AMT exemption has not. The AMT percentage, at it’s highest, is only 28%, but the regular tax brackets go as high as 35%. The rich are paying more than the AMT tax, so they don’t get hit by it, but the average wage-earners are starting to see it on their tax returns. It is now poised to hit those who make between $75,000 and $500,000, most of whom rely on their property tax deductions and state tax deductions, both of which are taken away in the reconfiguring of the AMT tax. The other thing that is affecting many taxpayers are the huge deductions they are taking for their home mortgage. I can attest that it is not uncommon for me to see home mortgage interest paid of $15,000 or more, and it only takes a person making $100k to have deductions of larger than about $27k before they fall into the AMT trap.

Recently, congress has been taking notice, and has put in some extender bills in order to save most average taxpayers the burden of falling into the AMT. These extenders were set to expire in 2007, making it incredibly important to get another extension (or a repeal, or some sort of change) to the AMT before next tax season comes around.

In 2006, 4 million people paid AMT. In 2007, it is set to hit 25 million people if nothing has changed. The IRS prints forms and starts creating the software for the new tax year in the middle of November, and anything Congress does afterwards delays things quite a bit, so here we are in the first week of December and have they changed anything? IRS gave warnings early enough, but they are finally trying to get around to it.

On a side note, in a phone call with the IRS yesterday, I spoke to an agent from Kentucky who told me that they have been informed that the IRS is planning to hold tax season until at least February 8th. I have also heard dates of February 10th, 15th, and 18th as the dates they may need to wait until before they can START processing returns, if Congress adds this extension to the AMT exemption amounts, in order to have enough time to write the software, etc. This means that if you send a return in prior to that, it sits around - and when things sit around, they back up, and when things back up, things get lost - which of course would be blamed on the taxpayer. I recommend efiling myself in order to get around that, but I shudder to think if efiling isn’t open until mid-February (usually it starts around Jan 15th) how many tax returns are sitting in our office until we can hit the send button, and how long that first transmission will take for acceptance.

Anyway, back to the story. Here’s where the political play comes in. So the Democrats have said that they will not pass anything that is no-pay: meaning a tax cut that is not revenue neutral by raising taxes somewhere else to cover. Republicans were singing that same song a few years ago, including the President, who was saying that he couldn’t fix the AMT without having a plan that covers the dollars lost by removing it - after all, the government stands to win by receiving bunches of money from all these new taxpayers that are falling into the AMT that wouldn’t have paid it before. In fact, in the last few years, republicans have COUNTED ON that money to make some of their other tax cuts revenue neutral, citing the phaseout of the AMT exemption that would bring in the revenue instead. The AMT would be hitting so many in the next few years that the tax code would have to undergo a complete overhaul just to bring in the money that would replace repealing the AMT if we wait too much longer. It may already be too late.

The Democrat-ruled House passed a bill last month fixing the AMT by creating 80 billion of new revenues elsewhere, including a rather controversial taxation of investors. Thursday, Republicans in the Senate nixed the part of the bill making it revenue neutral, and the Senate passed it 88-5, which now fixes the AMT for one more year by increasing the national debt instead. No one is paying for the removal of AMT, folks…

From the AP:
The Senate Finance Committee chairman, Sen. Max Baucus, a Montana Democrat, said it was not his first choice to pass an unpaid-for bill, but “this is our best choice.”

Earlier Thursday, Senate Republicans united in stopping the Senate from moving to the House-passed bill.

Even the President has said that he won’t sign a bill that increases revenue elsewhere. Sure, why does he care, he doesn’t need to win votes anymore. The longer we wait on this, the further out tax season is going to be pushed, I have a feeling…this is just a lose-lose situation and I can’t stop watching…hopefully we will see something happen this week, stay tuned.

Resources:
http://online.wsj.com/article/SB119698576415016475.html?mod=googlenews_wsj
http://www.taxfoundation.org/blog/show/2127.html
http://www.aicpa.org/pubs/jofa/oct1999/kern.html
http://www.kansascity.com/news/nation/story/393356.html