Congress to stop spread of reviled Alternative Minimum Tax

The "fix" of the Alternative Minimum Tax is becoming as established a ritual on Capitol Hill as the annual lighting of the Christmas tree. But this year, the fix didn't arrive before the fir.

That's because it's caught up in a high-stakes battle over whether the $50 billion needed to pay for a year's reprieve of the AMT must be offset by tax increases.

If the tax code isn't fixed before Congress leaves town this month, some 22 million taxpayers will be subject to the AMT in the 2007 tax season, up from 3.5 million in 2006. For the average taxpayer, that means owing $2,000 more in federal income tax.

That won't happen, because the fix is on the way, say congressional leaders. On Nov. 7, the House passed an AMT patch, which amends the tax code to increase the AMT exemption to $44,350 for single taxpayers and $66,250 for married couples. It's paid for with $82.5 billion in tax increases, including raising the tax rate on some investment fund managers.

Last week, the Senate passed its version with no tax increases. "We will take up the AMT again this week, with offsets, to give the Senate another chance to do the right thing," says a House Democratic leadership aide.

Delays in completing the fix are already disrupting the filing season. The IRS has started printing 2007 tax forms, without the proposed fix. IRS officials say they will need at least seven weeks to rewrite computer programs in line with changes in the AMT. Private-sector tax prep companies say they can do it in five to seven business days.

"We are watching the debate unfold very closely," says Julie Miller, a spokeswoman for TurboTax in San Diego, in a phone interview. "The IRS is prohibited by law from making changes until Congress acts, but we have the resources to do contingency planning and prepare multiple scenarios. When the final legislation is passed, we don't have to start from scratch."

But the problem of processing electronic returns persists. Even if the patch were passed tomorrow, the Treasury Department says there still could be delays in refunds of up to 10 weeks for some 50 million taxpayers.

Congress passed the AMT in 1969, after reports that 155 people earning more than $200,000 a year, including 21 millionaires, had paid no federal income tax in 1967. "We face now the possibility of a taxpayer revolt if we do not soon make major reforms in our income taxes," Treasury Secretary Joseph Barr told the Joint Economic Committee on Jan. 17, 1969.

Deluged with hundreds of thousands of letters from angry constituents, lawmakers soon after added a minimum tax to the tax code, but neglected to index the new tax to inflation. Over time, more and more taxpayers were subject to the AMT.

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