Congress Proposes New AMT Rules

House Democrats from the tax writing committee have reached a consensus on reforming Alternative Minimum Tax (AMT) laws, according to CNN Money. The proposed revision will give the biggest tax break to middle and upper-middle class households.

History: AMT was instituted in 1969 as a means to ensure the wealthiest households paid income taxes. The income limit was set at $99,000, which at the time, was a very high income. Since 1969, there have been numerous changes to tax laws, but the laws governing income limits for AMT were never adjusted for inflation, even though paychecks have raised substantially through the years.

Problem with AMT: AMT hurts many tax payers because it was originally designed to tax those who had above average wealth. Tax payers hit with AMT are prevented from taking many tax deductions most middle class tax payers traditionally take, including deductions and exemptions for dependent children, state and local taxes, and property taxes. Additionally, tax cuts that were made in 2001 and 2003 were not accounted for under AMT. People affected by AMT are required to prepare their taxes under AMT and normal tax laws and take the lesser of the two returns.

If the AMT is not reformed, current AMT laws threaten to affect close to 30 million tax payers by 2010.

Proposal: The tax writing committee has approved a proposal by Rep. Richard E. Neal (D-Mass.). There are 4 main points to Rep. Neal’s proposal:

  1. Exempt taxpayers from AMT with incomes < $250,000.
  2. Increase AMT liability for incomes > $500,000.
  3. Phase-in AMT liability for those earning between $250,000 and $500,000.
  4. Provide additional tax cuts for lower-income taxpayers not subject to AMT.

Possible Roadblocks: Depending how the changes are instituted, AMT reform could reduce federal tax revenue between $500 billion and $1 trillion over 10 years. This is a substantial sum of money, even by US government standards. It is likely that if changes are made to AMT, they will be phased in and taxes will be raised in other areas to make up the difference.