AMT: Tick-tock, Congress
Millions of taxpayers have been left in the dark about just how much they'll owe the IRS this year thanks to indecision in D.C.
NEW YORK (CNNMoney.com) -- Lawmakers have effectively denied roughly 23 million taxpayers the ability to plan adequately for their taxes this year.
That's because they have yet to decide just what they're going to do about the Alternative Minimum Tax (AMT). If they end up doing nothing, those 23 million folks will get hit with the "wealth" tax - about 19 million of them for the first time.
What you need to save
The AMT was originally intended for the wealthy few when it was created nearly 40 years ago. But because Congress never indexed for inflation the amount of income exempt from AMT and because it disallows a lot of popular tax breaks, tens of millions of middle-class taxpayers could get hit.
While leading politicians and tax experts have been saying that at the very least Congress will pass a "patch" this year to shield the majority of the 23 million from the AMT, it is not clear what that patch would look like.
Since 2001, Congress has temporarily increased income exemption levels and allowed for some personal credits to be used. The last patch - for 2006 - put the exemption levels at $62,550 for joint filers and $42,250 for single filers. Without a patch, the 2007 exemption amounts will fall to $45,000 for joint filers and $33,750 for single filers.
Even if Congress does pass a patch, the Joint Committee on Taxation estimates that 5.4 million tax filers are likely to be subject to the AMT in 2007, up from 4.2 million last year.
There are some lawmakers, most notably the House's leading tax writer, Ways and Means Committee Chairman Charles Rangel (D-NY), who have said their goal is nothing less than broad reform of the AMT.
As recently as two weeks ago Rangel told reporters, "I'm not even discussing patches," according to the National Journal's Congress Daily. Instead, Rangel said he plans to introduce what's been described as an "all-encompassing" tax bill that may include AMT reform, corporate tax reform, private equity taxation and revised income tax rates.
With at most six legislative weeks left on the Congressional schedule this year, it seems highly unlikely that a deal would be sealed on a broad AMT reform package for two reasons:
Sure lawmakers could push back the Senate's Nov. 16 adjournment date and legislate until it's time to deck the halls. And sure, lawmakers could act as late as April 14, 2008 to issue a patch or pass reform and make it retroactive for tax year 2007. But that would be an enormous inconvenience for anyone who chooses to file their taxes before 11:59 p.m. April 15.
As enrolled agent Cynthia Jeanguenat, who is licensed to represent taxpayers before the IRS, put it: "Oh, God."
What tax experts advise
The "who knows?" factor surrounding AMT has left tax advisers hamstrung in figuring out which of their clients will be hit with the tax.
David Lifson, president of the New York State Society of CPAs, tells clients who could be candidates to sock away 1 percent to 2 percent of their gross income, so that if it turns out they do have to pay AMT in April, they'll have the extra cash on hand. If they don't, he said, then they'll at least have some enforced savings.
Broadly speaking, you might be at risk of having to pay AMT if more than one of these situations apply:
Jeanguenat and enrolled agent Marc Standig are telling clients to do what small things they can to minimize their tax bite, such as maxing out their contributions to tax-advantaged retirement plans and tax deductible IRAs.
For those who may be AMT candidates, Lifson and Standig also advise boosting tax withholdings on their paychecks if they have a lot of other income - such as dividends or a big bonus - that have few or no withholdings but which they will owe tax on come April 15. That way, they may avoid underpayment penalties.
Some lawmakers, like Senate Finance Committee Ranking Member Charles Grassley (R-Iowa), have said they would like to pass legislation that would exempt taxpayers from underpayment penalties if they didn't know they'd have to pay AMT and consequently didn't have enough tax withheld throughout the year.
That would be the right thing to do. But it will be hard for a taxpayer to prove, and time-consuming. And it's no substitute for giving taxpayers certainty about where they stand before a tax year begins, not when it's coming to an end.