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NEW YORK (CNNMoney.com) -
The House on Wednesday overwhelmingly approved a $31.5 billion bill that would prevent millions of Americans from paying higher tax bills in 2006 as a result of the alternative minimum tax.
The bill would extend for one year, through 2006, an increase in the levels of income that would be exempt from the AMT, a move that would shield an additional 17 million or so taxpayers from being subject to the higher tax next year. The $31.5 billion cost of the bill represents the tax revenue the federal government would lose if the House bill becomes law.
The AMT system was originally designed to make sure the very wealthy didn't dodge their fair share of taxes. But because the income-exemption levels were never adjusted for inflation, the AMT is set to capture an ever-increasing number of taxpayers, many of them middle-income, absent a change in the law.
That's why, in recent years, lawmakers have issued temporary "patches" that raise the AMT exemption levels for a year or two at a time. But temporary solutions are considered inadequate to address the complexity and fairness issues the AMT presents, so there also has been a push to eliminate the AMT altogether as part of broader tax reform package.
People must pay the AMT only if their tax liability under the AMT system is higher than it is under the regular income tax code. That means calculating their tax liability under both systems, which differ in key ways.
The AMT, for instance, disallows many of the deductions and exemptions allowed under the regular system, which can make your taxable income look a lot higher.
The House's AMT bill is separate from a $56 billion tax bill for 2006, which House lawmakers are expected to vote on Thursday. AMT relief has broad bipartisan support, but the separate House bill is a concern for Democrats, according to a report in Congress Daily and Heather Bennett, editor in chief of Tax Analysts' federal publications. Here's why:
The Senate in November passed its own tax relief bill that included AMT relief but did not include an extension of lower tax rates for capital gains and dividends -- a centerpiece of the House's tax bill and something President Bush has been pushing for.
The Senate and House will need to negotiate which elements from each of their bills make it into a final joint bill that will be sent the president.
"The fear among Democrats is that passage of a stand-alone AMT bill would free up $30 billion that Republicans could use to include the capital gains and dividend cut, or other GOP priorities, in the tax reconciliation bill," Congress Daily reports.
The extension of the investment tax breaks, currently set to expire in 2008, would come at a time when lawmakers want to reduce the budget deficit and have proposed doing so in part by curbing spending increases for programs that target low-income Americans. Critics say the investment tax breaks primarily benefit upper-income taxpayers.
After the House vote on Wednesday, Rep. Bill Thomas (R-Calif.), chairman of the Ways and Means Committee, said he thought it would be possible for lawmakers to complete their work on a final joint tax bill this year, Congress Daily reported.
But given all the other legislative business on both the House and Senate agendas before Christmas, there is a possibility that the conference on the final tax bill will get pushed into 2006. If that's the case, the Senate may try to pass its own separate bill on AMT relief before the holidays to make sure it's in place before the New Year.
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