Alternative Minimum Tax: A Thing of Shreds and Patches

December 26, 2007 03:07 PM
by findingDulcinea Staff
Congress authorizes a “patch” that reduces the number of people liable for the alternative minimum tax; the middle-class tax burden decreases, though only for a year.

30-Second Summary

Under the revised code, the amount of income exempt from the AMT went up to $44,350 from $42,500. For married couples, it rose to $66,250 from $62,550.

According to The New York Times, on Dec. 19, “House Democrats angrily approved the bill,” having failed to get Republicans to endorse new tax allocations that would have paid for the patch.

In contrast, a statement from White House press secretary Dana Perino said, “We’re pleased that today Congress was finally able to pass legislation, without raising taxes.”

The AMT was first devised in 1969 to prevent the top one percent of earners using deductions and tax shelters to evade tax. People falling in that bracket were required to calculate a second, alternative tax payment and pay whichever amount is the greater.

However, thanks to inflation, a much larger proportion of Americans have to calculate the alternative tax than was originally intended. Approximately, 20 percent of Americans were affected by AMT this year.

One untoward consequence of the new legislation is that it is likely to delay the payment of refunds, because the IRS has to reprogram its computers.

That could be more than an inconvenience. Morgan Stanley analyst David Greenlaw said there is a possibility that the delay could hurt the economy in the first quarter of next year.

“Since surveys show that many consumers plan their spending around the holidays based on an assumption that their tax refund will be available at a certain time, and because the looming delay to the refund season has not yet been widely publicized, we may see a spike in demand for refund anticipation loans,” Greenlaw writes.

Headline Links: The passage of the AMT legislation

Background: The Congressional Budget Office

Reactions: The IRS

Opinion & Analysis: Prudent investment

Reference Material: The IRS and the legislation


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