Baucus, Grassley introduce bill to repeal AMT

Leading Senate Finance Committee members call for an end to the wealth tax that threatens middle-income taxpayers.

By Jeanne Sahadi, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- A bipartisan group of senators on Thursday introduced a bill calling for the death of the stealth tax that lawmakers on both sides of the aisle have criticized.

Senate Finance Committee Chairman Max Baucus (D-Mont.), ranking Republican and former committee chairman Charles Grassley (R-Iowa) and three other committee members introduced legislation to fully repeal the alternative minimum tax (AMT) as of 2007.

"This bill is really a bellwether for one of the Finance Committee's biggest priorities this year. This Congress intends to provide tax relief to middle-income Americans in a fiscally responsible way, and the AMT is the right place to start," Sen. Baucus said in a statement.

The bill is similar to one the group introduced in 2005.

On the House side, Charles Rangel (D-NY), the new chairman of the Ways and Means Committee, has said repeatedly that fixing the AMT is a priority.

The AMT imposes a higher bill on taxpayers than the regular tax code. The tax, originally intended for the wealthy, now threatens to catch tens of millions of middle-class taxpayers unless lawmakers increase the AMT adjusted gross income exemption levels, since the original levels were never adjusted for inflation. (For more on how the AMT is calculated, see below.)

So far, Congress has been issuing temporary annual "patches." For tax year 2006, for instance, in addition to allowing certain personal credits to offset AMT liability, they raised the AMT adjusted gross income exemption levels to $42,500 for single filers, up from $40,450, and to $62,550 for joint filers, up from $58,000.

But if no other changes are made, the exemption levels for tax year 2007 will drop to $35,750 for single filers and $45,000 for married filers, and the personal credits will be disallowed.

As a result, the number of taxpayers nabbed by AMT will jump from 3.5 million in 2006 to 23 million for tax year 2007 and to 39 million by 2017, according to the Tax Policy Center. That assumes President Bush's tax cuts implemented since 2001 expire as scheduled. If they don't, then 53 million taxpayers - or about half of all taxpayers - will pay the AMT by 2017.

Those hardest hit: married couples with kids who take a lot of the deductions and credits disallowed under AMT. The Tax Policy Center estimates that by 2010 nearly 90 percent of married couples with two or more children and an adjusted gross income between $75,000 and $100,000 will be subject to AMT.

The cost of full repeal is not cheap, and it could thwart the chances of balancing the federal budget by 2012.

The Tax Policy Center estimates that repealing the AMT would cost $945 billion between now and 2017, assuming the tax cuts are allowed to expire. If they're extended, the projected cost over 10 years rises to $1.7 trillion.

What is the AMT exactly?

The AMT dates back to 1969, when tax rates were as high as 91 percent and the wealthy could exercise so many loopholes in the tax code that they could end up paying no tax whatsoever, according to Mark Luscombe, principal federal tax analyst for CCH, a tax information publisher.

The point of the AMT was to prevent that from happening. The problem for today's taxpayers is that the structure of the AMT is pretty much as it was in 1969, when the definition of uber-rich in terms of nominal income (i.e., not inflation-adjusted) was much lower than it is today.

So taxpayers now need to calculate their tax liability two times, once under the regular system and once under the AMT system, and pay the higher of the two.

Under the regular IRS rules, you start with your gross income and subtract deductions like state taxes you paid, and exemptions like child credits. Eventually, you arrive at your taxable income.

Under AMT rules, you still start with your gross income, but many of the usual deductions and exemptions are disallowed. So suddenly, your taxable income is a lot higher.

Even though some deductions still stand under AMT, including those for mortgage interest and charitable donations, some key breaks are lost. They include:

  • State and local income taxes and property taxes
  • Unreimbursed business expenses
  • Child-tax credits
  • Tax-preparation fees
  • Home-equity loan interest on loans used to improve your house

Even though the highest tax rate under the AMT - 28 percent - is lower than that in the regular tax system - 35 percent - you will pay more under AMT because you're paying the tax on a greater amount of taxable income.

How do you know if you're vulnerable to AMT? According to Tom Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants, a very rough guideline for married couples filing jointly this April is this:

You may be subject to AMT if your gross income is over $100,000 and your exemptions plus your state and local tax deduction approach $30,000, which is about half the income exemption level ($62,550) for joint filers for tax year 2006.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.