Christmas came a few days early for approximately nineteen million taxpayers. On December 19th, the House finally passed the Senate's version of a bill extending the annual fix to the Alternative Minimum Tax through 2007. Had nothing been done about the AMT, the number of taxpayers paying this tax was expected to jump six-fold - from 4 million in 2006 to 23 million in 2007.
Each year since 2001, Congress has provided for a temporary fix to the AMT. So what took so long this year? With a projected loss of $50 billion in tax revenues due to this one-year fix, the House wanted to include revenue raisers of at least that amount in their version of the bill. The Senate, however, was opposed to including any tax increases in their bill, so it wasn't until late in December that both houses of Congress could finally agree on the current version of AMT relief.
What is the AMT? The AMT is a parallel tax system that was instituted in the late 1960's to ensure that high income taxpayers pay at least a minimum amount of taxes. Thirty-eight years ago, the tax laws were much different then today's tax code. Back then, the top tax bracket was 70% or higher, and deductions, credits, and other tax breaks were abundant. As a general rule, only high income taxpayers were hit by this tax.
In recent years, however, more and more middle-income taxpayers are finding themselves paying this tax. Over the years, the top bracket has been cut in half to 35% while the upper limit for each of the tax brackets has increased substantially because of inflation. Even so, the AMT rates have held steady at 26% and 28%, and the allowable AMT exemption has not kept pace with inflation over this time period.
Even though Congress made millions of people nervous about the impact of the 2007 AMT, they did reward U.S. taxpayers for their patience. As part of this one-year fix, the AMT exemption for married couples has been increased to $66,250 for 2007, up from $62,550 allowed for 2006. Had Congress not acted, the AMT exemption was slated to be cut to just $45,000.
Remember, the purpose of this exemption is to protect middle-income taxpayers from paying the AMT. This increase of $3,700 in the AMT exemption should help keep even more taxpayers from being hit by this tax in 2007.
Time Heals AMT Things
Now for the bad news. Expect delays in being able to submit your tax return to get your refund this winter. The IRS anticipates that they will need seven weeks to update their systems to reflect the one-year fix to the AMT. And since most taxpayers and tax preparers rely on computer programs to correctly process tax returns these days, software companies will also need some time to correct and test their programs.
Assuming all goes to plan, the IRS should be all set to begin accepting tax returns early in February, which is less than a month after the planned mid-January start date to the 2008 filing season. Even so, the twenty million taxpayers who will now avoid the AMT for 2007 probably all agree that it's definitely worth the wait.