Potential Tax Legislation Whose Time Has Come – Repeal of Individual Alternative Minimum Tax – A Commentary

By Russell O. Coon, CPA

Last month a bill was introduced in the Senate that, if passed, would remove what has become an extremely complex and expensive dual tax system affecting most middle income Americans.  The problem (from a government standpoint) is that, if passed, it will remove $600 Billion in tax revenue over the next ten years. 

Congress, over the years has been very good at passing tax legislation that they believe their voters see as taxing somebody else.  Rather than straight up tax rate increases, the political process has produced deduction limitations, exemption limitations, phase-outs of benefits, time limited tax credits and deductions, and other such complexities that have the same effect of tax increases without as much perceived political downside.

In early January the incoming Democratic Chair of the Senate Finance Committee (Max Baucus D-MT) along with significant Republican Senators has introduced legislation to repeal the Individual Alternative Minimum Tax (the “AMT”) effective January 1, 2007.  He has stated that the AMT repeal is “really a bellwether for one of the Finance Committee's biggest priorities this year.  The new Congress intends to provide tax relief to middle-income Americans in a fiscally responsible way, and the AMT is the right place to start.  It's time not only to stop this stealth tax for 2007, but to look for longer-term solutions that are actually financially feasible.”  The bill, as introduced, is a very simple piece of legislation and, except for retaining the AMT for certain credit purposes, effectively removes the entire Individual AMT structure.

What started many years ago as a second income tax measure designed to tax a relatively few taxpayers taking too much advantage of certain deductions and types of income, has developed over time as the primary tax system effecting most middle income Americans. 
As inflation has widened regular tax brackets and tax legislation has reduced regular tax rates, the AMT structure has stayed relatively constant.  The effect of the modifications are that many Americans are not getting deductions for things that they believe they are, and are paying tax on income that they did not believe was taxable.  Common items causing the imposition of the AMT tax are regular tax deductions for state income taxes, real estate taxes, certain medical expenses and other itemized deductions.  Certain kinds of tax-exempt municipal bond interest are taxable along with certain income from stock options exercises and other items.  While the list is not endless, it is extensive.

At the heart of the matter is the political will to determine what should be taxable and what rate should be applied to that income.  The AMT tax is only one component of what has become an increasingly stealthy individual income tax system.  It will be interesting to see if the new political leadership really has the political will to pass this legislation in its unaltered form and to see how and if they will get the money to pay for it.  Even in Washington, $600 Billion is no small amount.  Stay tuned.

If you would like to discuss this subject further, please contact Russ Coon (rcoon@pmn.com) or any member of our tax service team at (617) 426-9440.

Note: This article represents a general overview of or opinion on certain tax issues or developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation.  We recommend you consult your professional tax advisor before taking any action based on anything in this article.

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