AMT Relief in the Works, Says Congress

Imagine having to calculate your federal income taxes twice. That's actually what will happen to more than 20 million taxpayers in 2011 if Congress doesn't take steps to fix the alternative minimum tax, or AMT, before the end of the year.

When it was enacted in 1969, the AMT was intended to ensure that high-income taxpayers didn't avoid paying taxes. The idea was that wealthy taxpayers should not be able to whittle their taxable income down to zero by taking advantage of too many tax breaks, like the home mortgage interest deduction or real estate tax deductions. With the AMT, taxpayers calculate their federal income tax twice, once under the "regular" rules and again under the AMT rules, which eliminated most of those favorable tax breaks. Taxpayers would then pay the highest tax amount calculated under both schemes.

Over the years, however, the AMT hasn't worked as planned. The AMT hasn't been indexed for inflation, so the number of taxpayers subject to the tax includes those never intended to be affected in the first place. The National Taxpayer Advocate has reported that 77% of the income subject to AMT is actually attributable not so much to breaks associated with the wealthy but for the disallowance of "ordinary" deductions like those for state and local taxes as well as personal and dependency deductions.

So why not simply repeal the AMT? The answer is easy: money. The AMT brings in about $70 billion per year. In a tough economy, repealing the tax would create a fairly substantial hole. Nobody in Congress wants that kind of blame.

So, for 2010, Congress is doing what it does at the end of every year: scrambling to "patch" the AMT. Rather than a complete repeal, Congress generally raises the limit for income subject to AMT at the end of each year.

This year, a bipartisan group, including Sen. Max Baucus (D-Mont.) and Sen. Chuck Grassley (R-Iowa), sent a letter to IRS Commissioner Doug Shulman proposing another one-time fix. They told the Commissioner:

"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 ... We urge the Internal Revenue Service to take all steps necessary to plan for changes that would be made by the legislation."

Without any changes, middle class taxpayers could be socked with additional taxes because of the AMT averaging about $3,900. In fact, for 2010, the exemption has actually decreased under current legislation to a mere $33,750 ($45,000 if married filing jointly or qualifying widow or widower; $22,500 if married filing separately). As of this week, the IRS was still expecting that to change, noting on its website, "Congress is expected to consider legislation that would increase the AMT exemption amounts" and promising to post updates as soon as possible. With just a few weeks left in 2010, we're all watching.