AMT ‘Patch’ Saves Millions from Higher Taxes

Published March 1, 2008

Federal income tax refunds for millions of taxpayers could be delayed this year, but higher income tax bills for millions of taxpayers will be avoided as a result of Congressional action to “patch” the Alternative Minimum Tax (AMT).

Nearly 20 million taxpayers will avoid tax bills that could have averaged $2,000 higher. Still, many taxpayer organizations remain bothered the AMT remains in effect.

“The outcome on the patch was as good as we could have expected. There were no tax hikes attached to it, but we’re back to being in the same situation for 2008,” said Phil Kerpen, director of policy at Americans for Prosperity, a national grassroots fiscal watchdog organization in Washington, DC.

“The AMT is an unplanned, unintended tax hike on the middle class. The way to fix a tax hike that was never supposed to happen is to get rid of it,” Kerpen continued.

Filing May Wait

Because the patch that keeps the AMT from affecting millions of Americans for the 2007 tax year (with tax returns due to be filed in 2008) came at the end of 2007, the IRS says more than 13 million Americans may have to wait until mid-February before filing their tax return, depending on what tax forms they need. The IRS needs time to reprogram computers to make adjustments.

Scott Hodge, president of the Tax Foundation, a national tax watchdog organization, had much the same take on the AMT situation as Kerpen.

“Save the stories written today about AMT, because you’ll be able to recycle them next year,” said Hodge in a press statement. “Crises like these happen because the tax code is such an unwieldy, uncontrollable mess. Sound tax policy requires these one-year fixes, gimmicks, and patches to end.”

At Americans for Tax Reform, Tax Policy Director Ryan Ellis said, “The AMT patch was good in that it prevented any more taxpayers from falling into the AMT trap.

“The bigger victory,” Ellis said, “was that it enshrined, once and for all, the principle that tax increases aren’t needed merely to keep current tax law in place. This is the beginning of the end of PAYGO, the lie that tax increases are necessary merely to prevent other tax increases.”

‘PAYGO’ Rules Dropped

PAYGO is the shortened term for “pay-as-you-go” budget rules. The idea behind PAYGO was to pay for tax cuts by raising other taxes or cutting spending to match tax cuts. Democrats who lead Congress promised to follow PAYGO rules in 2007 but backed down and ignored the rules. Most Republicans in Congress opposed PAYGO.

PAYGO supporters said the rules would be fiscally neutral. PAYGO opponents argued the policy ignored economic dynamics that tend to boost government revenues as tax cuts spark economic growth.

Not Indexed for Inflation

Congress created the AMT in 1969 to ensure a handful of citizens who had high incomes but paid no income tax would pay something. These few high-income earners–at the time, fewer than 200–were legally able to avoid paying income tax by using deductions, credits, and other means to wipe out their liability.

The AMT does away with most credits and deductions, forcing taxpayers at certain income levels to figure their taxes under both the standard system and the AMT system and pay whichever amount is higher.

The AMT has never been indexed for inflation, and today millions of middle-income taxpayers are being pulled into it. Congress has declined to make indexing adjustments a permanent feature of the tax code, hence the need for temporary patches.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News and a research fellow at The Heartland Institute.

For more information …

The Tax Foundation has released two primers on the Alternative Minimum Tax, one detailing common questions and another offering a revenue-neutral solution:

The Tax Foundation also has released a report showing the impact of the AMT patch on hypothetical American families: