March 31st, 2009 |  Print This Post |  Email This Post

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 you 4 million – it just keeps the other 24 million from joining your 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.