Taxpayers Anxiously Await Annual 'Patch' to Alternative Minimum Tax

From FOX News.com:

Of all the tax issues facing Congress when it returns for a lame duck session after the Nov. 2 midterm elections, the annual rite of patching the Alternative Minimum Tax will be the most urgent.

Unlike the debate over the Bush tax cuts, which will affect taxpayers' income in 2011, the AMT applies to 2010. And the delay in patching it is already causing problems and raising alarms for large numbers of middle-income taxpayers -- as many as 25 million Americans, according to one expert -- who could face a huge increase in their tax payments if Congress doesn't act.

Enacted in 1969, the Alternative Minimum Tax was originally aimed at 155 extremely wealthy taxpayers who had avoided paying federal taxes completely. It was an add-on tax designed to ensure that everyone paid some income tax every year. Since then it has evolved into the primary tax mechanism for taxing high income taxpayers.

Under the original system, taxpayers who earned more than $200,000 -- a very high income 30 years ago -- were required to calculate their taxes differently, resulting in a larger tax payment for the wealthy.

But unlike most other income tax rates, the AMT was never indexed to inflation, and since 1982 the AMT has become a parallel tax system and a critical element in funding the government. It covered more than 4 million high-income taxpayers in 2009, according to the Congressional Budget Office.

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Senate Finance Committee Approves Tax Cuts in 14-9 Vote

From MarketWatch:

A Senate committee approved $342 billion in tax cuts on Tuesday as part of a larger plan to stimulate the economy. The Senate Finance Committee voted 14 to 9 to approve the legislation after amending the original proposal to make sure middle-class taxpayers aren't hit by the alternative minimum tax this year. All Republicans on the committee opposed the package except for Sen. Olympia Snowe, R-Me, according to Dow Jones Newswires. The bill includes a $500 individual tax credit, tax breaks for businesses to hire workers and buy equipment, and tax incentives for energy efficiency.

Let's Drill Our Way To Lower Taxes

From the Wall Street Journal:

“As the tide of public opinion seems to shift in favor of House Republicans' demand for a vote on domestic energy exploration, one supporting argument has yet to be discussed: drilling as a way to lower your taxes.

Opening our vast domestic resources, both on and offshore, to responsible oil and gas development would produce an influx of tax revenue from additional lease sales and royalties, as well as from income and excise taxes. These additional collections could be used, for example, to offset the alternative minimum tax (AMT).

The Congressional Research Service recently estimated the potential federal revenue from Arctic National Wildlife Refuge (ANWR) oil development at $191 billion over 30 years -- roughly $18.36 per barrel, based on projections of recoverable reserves. Applying that formula to the 107 billion-plus barrels of recoverable oil that federal agencies estimate is in ANWR, the nearby National Petroleum Reserve and offshore tells us that sensible drilling could yield nearly $2 trillion in overall revenue over 30 years, or an average of about $65.5 billion per year.

Meanwhile, the ‘cost’ in lost tax collections of protecting 22 million families from the AMT this year stands at about $62 billion. That figure is sure to balloon in the future as more and more Americans are ensnared by the complex system. Tax-hungry politicians defend the AMT by pointing to all the federal revenue that would be lost by ending it. (Never mind the fact that AMT revenue is ill-gotten in the first place, or that the estimated ‘costs’ of its repeal to the federal budget ignore the benefits to economic growth and resulting additional revenues.) While oil and gas development won't fill government's coffers overnight, it will provide a down payment in the near-term, and big windfalls in the out-years that can help deal with some of the most intractable tax problems we face.

We helped create our energy supply problem by putting resources off-limits. Let's develop those resources and use the revenue to help alleviate tax burdens in this difficult economy. More supply, lower gas prices, greater energy security, and lower taxes. What are we waiting for?”

New Congressional Budget Office Report

Last week the Congressional Budget Office released a new study on the long-term effects of indexing the alternative minimum tax and extending the tax reductions of 2001 and 2003. You can read a PDF of the study by clicking here, or you can learn more about the Congressional Budget Office by checking out their website.

Ways & Means Committee Passes AMT Patch

Earlier in the day, the House of Representatives Ways & Means committee passed a new patch to the Alternative Minimum Tax (AMT). The final vote was 22-16, with mostly Democrats in favor of the patch designed to protect taxpayers from the unpopular tax.

"The measure would deliver this tax relief to middle-class families," claims committee chairman Charles Rangel, "without adding to the deficit and without forcing future generations to pay for the decisions we make today."

If the bill is fortunate enough to become legislation, it would provide $61.5 billion in AMT relief. The lost revenue would be made up in part by taxing carried interest at standard income rates instead of the 15% capital gains tax rate. For more information, check out House panel approves a paid-for AMT relief bill on Google news.

IRS Now Processing AMT Affected Returns

Yesterday afternoon, the IRS announced that they have begun officially processing the five tax forms that were affected by the last minute AMT legislation. On Monday, IRS systems began to unofficially accept and process returns that include the five affected forms. After several days of processing, the IRS has confirmed that their systems are in fact working properly.

Back in December, the IRS announced that they would have to delay the processing of several AMT affected tax forms. However, for most people the filing season this year began on time. Only taxpayers whose return included the five affected forms were forced to wait.

The affected forms include:

• Form 8863, Education Credits
• Form 5695, Residential Energy Credits
• Schedule 2, Form 1040A, Child and Dependent Care Expenses for Form 1040A Filers
• Form 8396, Mortgage Interest Credit
• Form 8859, District of Columbia First-Time Homebuyer Credit

How the AMT Will Affect 08 Tax Filing

With Congress passing last minute changes to the Alternative Minimum Tax (AMT), expect the upcoming tax season to get quite confusing. The IRS expects tax season to begin as usual this January, except for the taxpayers affected by last minute AMT "patches." They estimate over 13.5 million taxpayers will use IRS forms related to the AMT. These taxpayers will have to wait to file their income tax returns until the IRS can reprogram its system.

The IRS hopes they will be able to begin accepting these tax returns by no later than February 11, 2008. They claims this date allows enough time to properly update and test their systems without disturbing other tax season related operations.

Therefore, federal tax returns that include the following forms cannot be filed until February 11th, 2008:

• Form 8863, Education Credits
• Form 5695, Residential Energy Credits
• Schedule 2, Form 1040A, Child and Dependent Care Expenses for Form 1040A Filers
• Form 8396, Mortgage Interest Credit
• Form 8859, District of Columbia First-Time Homebuyer Credit

The AMT became part of the U.S. tax code with the Tax Reform Act of 1969. Originally, Congress designed the AMT to target a small number of high-income taxpayers that could claim so many deductions they owed little or no income tax. However, the AMT gained a lot of negative attention as an increasing number of middle-income taxpayers became subject to the AMT.

IRS Working Quickly to Implement AMT Patch

The IRS announced yesterday that it will immediately begin taking the necessary steps for its income-tax processing systems to prepare for the upcoming tax season following final passage of the Alternative Minimum Tax "patch" Wednesday by the House of Representatives.

"Our people will do everything they can to quickly update our systems for this major change and make this filing season as smooth as possible for everyone," said Linda Stiff, IRS Acting Commissioner. "Our goal is to process tax returns accurately and to issue refunds to taxpayers as quickly as possible."

The IRS will post more information on the AMT patch on their website as it becomes available.

AMT Advice

The alternative minimum tax was created in 1969 to catch wealthy Americans who were avoiding paying their fair share of income taxes. Today, the AMT is now a taxing mechanism that adversely affects middle class Americans. For more information on the AMT check out Yahoo News.