Unless Congress takes action, more than 20 million Americans will get hit with unexpected tax increases for this year, including some people earning less than $75,000.
This has nothing to do with the Bush tax cuts set to expire at the end of this year, but a lot to do with congressional gridlock. Temporary relief from the alternative minimum tax, or AMT, expired at the end of last year. Congress hasn't done anything yet this year to prevent the tax from exploding. It's among a number of tax-related issues the lame-duck Congress has to consider before adjourning next month.
If gridlock persists, the AMT will ensnare nearly 29 million taxpayers for 2010, up from about 4 million for 2009, according to estimates by the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution. That would represent about a fifth of the approximately 141 million individual income tax returns received by the IRS this year.
The impact on taxpayers, and on the shaky economy, would be enormous. If Congress sits on its hands, the AMT would generate more than $102 billion in additional tax revenue for 2010, up from about $34 billion for 2009, says Roberton Williams, senior fellow at the Tax Policy Center. That might help reduce the federal deficit, but it would cut into consumers' paychecks and likely crimp spending. Those newly hit by the AMT would pay an average of $2,000 more in federal income tax, according to Tax Policy Center estimates.
Congressional leaders of the tax-writing committees are keenly aware of the problem, and the potential repercussions. They vehemently oppose the idea of expanding the AMT, especially at a time when the economy is trying to recover.
This week, four key lawmakers sent a letter to IRS Commissioner Doug Shulman vowing to "do everything possible" to enact speedy AMT relief legislation "in a form mutually agreeable to the Congress and the president." The letter came from Senate Finance Committee Chairman Max Baucus, D-Mont., and House Ways and Means Committee Chairman Sander Levin, D-Mich., as well as the Finance Committee's ranking Republican member, Chuck Grassley, R-Iowa, and Ways and Means ranking member Dave Camp, R-Mich., who is in line to take over as Ways and Means chairman next year.
"As the leaders of the Congressional tax-writing committees, we want to assure you that Congress is working on legislative relief," the lawmakers said. "We will work to craft the AMT provision so that, in the aggregate, not one additional taxpayer faces higher taxes in 2010 due to the onerous AMT."This legislation "will allow the personal credits against the AMT and the exemption amounts for 2010 to be set at $47,450 for individuals and $72,450 for married taxpayers filing jointly," the letter said.
The question now is whether the four tax policy leaders can muster enough support from their colleagues to get something passed before the end of the year. Commissioner Shulman had written to the four lawmakers earlier in the week noting that the IRS will face "significant challenges" in next spring's tax filing season due to an unusually large number of expected tax law changes.
With such powerful lawmakers in favor of AMT relief, it might seem a safe bet that Congress will approve at least a stopgap measure. But in this Congress, even popular tax provisions with strong bipartisan support can easily get sidetracked, especially if they get entangled in larger tax-legislative battles.
The AMT is a classic example of how congressional attempts to cure a small problem can turn into a large problem. In the late 1960s, Treasury announced that about 150 Americans had legitimately managed to pay no federal income tax – even though they had made more than $200,000. That led to an early version of what has become known as the AMT.
Because Congress didn't index the AMT for inflation, the tax has been hitting growing numbers of taxpayers over the years – including many with modest incomes. To prevent the AMT from expanding rapidly, lawmakers over the year have approved stopgap measures, known as "patches." The last patch expired at the end of 2009.
Among those most likely to be hit by the AMT each year are taxpayers living in high-tax areas, such as New York City, New Jersey, California and Washington, D.C., and who earn between $100,000 and $500,000 annually. But the AMT, which is fiendishly complex, also can hit people making even less than that. The AMT operates under different rules than the regular tax system. For example, state and local taxes can't be deducted under the AMT. That's why it hits large numbers of people in high-tax areas.
Many influential organizations, including the American Bar Association tax section, have called for complete repeal of the AMT. They say it hits too many people it wasn't originally designed to affect – and that it is much too complex.
Sen. Grassley has been trying to get Congress to focus on AMT relief all year. Earlier this year, he summarized the situation succinctly: "Everyone seems to agree that something needs to be done quickly, but the discussion doesn't go any further from there."
Now, it's crunch time.