December 21st, 2009 |  Print This Post |  Email This Post

It’s Christmas Week, But There are No Presents in Our Stockings from Congress

The House has adjourned for the year, and the Senate is putting all of its energies into the massive health care reform effort. Left behind – far behind in fact – is any thought of relief for the 24 million taxpayers who will become subject to the Alternative Minimum Tax for the first time on January 1, nor for the significant increase in the amount of AMT paid by each of the four million-plus already enveloped by it.

The issue? The AMT exemption level and the so-called annual “patch.” Below is a reprint of two articles that appeared on amtblog.com earlier in the year, after President Obama signed the 2009 Stimulus Act into law.

The AMT “patch”

Once again we read that Congress has fixed the AMT problem by enacting a temporary “patch” in the recent stimulus bill. With this, 24 million taxpayers who otherwise would be in the AMT in 2009 are spared – but only for one year. Come January 1 these 24 million people again risk falling into the AMT.

What is this all about? It’s simply another example of the law of unintended consequences. When the first minimum tax was enacted back in 1969, it seemed like a good idea – 155 taxpayers making over $200,000 were paying no taxes at all under the regular income tax, so a “minimum” tax would make sure that they did. But today that 155 has exploded to over 4 million who are paying the AMT. Unfortunately, this patch does nothing for these 4 million – it just keeps the other 24 million from joining this exclusive club.

Why is this happening? The principal reason for this kudzu vine-like growth in the number of AMT victims is the failure to index the AMT for inflation, while the Regular Tax is so indexed. The annual patch fixes this with a catch-up AMT indexing adjustment. In our next article we will explain indexing and this annual adjustment.

Why just a one-year patch and not a permanent fix? The answer is simple economics – the revenue loss for the 2009 fix alone is 70 billion dollars. A permanent fix, using Congress’ 10-year forecasting model, could approach a cost of nearly 1 trillion dollars. Now you’re starting to talk about real dollars.

Indexing

The AMT “patch” that Congress passed in the recent stimulus bill saved 24 million taxpayers from falling into the AMT in 2009. As mentioned in the last article, this temporarily fixed the problem caused by Congress’ original failure to index the AMT for inflation.

What is indexing? Under our system, tax brackets are progressive – i.e., the more you make, the higher your tax bracket. Some time ago Congress decided it wasn’t fair to have taxpayers fall into a higher tax bracket if the only increase in income simply reflected inflation. For example, in 2008 a single taxpayer hit the 33% bracket when taxable income reached $164,550. In 2009, that same taxpayer will be able to earn $171,550 before hitting 33% – a 4.3% increase. Presumably the CPI increased by 4.3% during this period. (Economists reading this are welcome to write in and explain how all this actually works).

For the AMT, the level at which an AMT payer goes from the 26% bracket to 28% ($175,000) has not changed. Instead, the Congressional fix is to index the AMT “exemption amount.” For a single taxpayer, in 2008 the exemption amount was $46,200. This is an increase of 4.2% over what it was the previous year, because of Congress’ 2008 patch. If the patch is not enacted, however, the exemption amount reverts all the way back to what it was in 1993 – $33,750 for singles. This is the reason such a large number of taxpayers – 24 million – are left hanging out there every year!

Keep an eye on this issue – the so-called AMT “patch.” It will be in the news, as it is every year.