IRS Scrambles to Implement The AMT Patch     Shortly after President Bush signed the AMT patch into law on December 26, the IRS announced: "The upcoming tax season is expected to start on time for everyone except certain taxpayers potentially affected by late enactment" of the changes.     The tax returns of as many as 13.5 million taxpayers using five forms related to the AMT legislation will have to wait until the IRS finishes reprogramming its systems for the new law, according to the tax agency.     The IRS has targeted February 11 as the potential starting date for taxpayers to begin submitting returns affected by the legislation. This date allows the IRS enough time to update and test its systems without major disruptions to other tax-season operations.       The delay caused by the AMT patch will affect taxpayers using these forms: Form 8863, Education Credits; Form 5695, Residential Energy Credits; Form 1040A's Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers; Form 8396, Mortgage Interest Credit; and Form 8859, District of Columbia First-Time Homebuyer Credit.

First, let's briefly review how the AMT works.

• The AMT calculation is run side-by-side with your regular income tax calculation.
• The starting point for the AMT is your annual taxable income.
• Next, you're required to add in special "tax preference items" and make other technical adjustments.
• Then you can subtract a special exemption amount based on your tax return filing status.

The new law raises the exemption amounts for 2007 tax returns as follows:

• For joint filers, the exemption amount is $66,250 (up from $62,550)
• For single filers, the exemption amount is $44,350 (up from $42,500)
• For marrieds filing separately, the exemption amount is $33,125 (up from $31,275)

The last step in the calculation is to apply the AMT rate to the remainder and compare the result to your regular income tax liability. In effect, you're required to pay the higher of the two. The applicable tax rate is 26 percent for the first $175,000 of AMT income; 28 percent for any AMT income above the $175,000 mark.

The AMT was originally intended to apply to only the wealthiest taxpayers. But it often triggers a higher tax liability for filers with large deductions for state income taxes. These deductions are added back as part of the AMT calculation. Similarly, it can affect individuals with numerous dependency exemptions

Unlike the regular income tax brackets, the AMT exemption amounts aren't indexed for inflation. It's been a struggle, but Congress has approved annual increases in the exemption amounts every year since the Economic Growth and Tax Relief Reconciliation Act (EGTRAA) was passed in 2001. These exemption amounts are scheduled to revert to pre-EGTRRA levels unless Congress takes further action.

To compound the problem, the exemption amounts are phased out for certain high-income taxpayers. If your income exceeds a specified level, the exemption amount is reduced by 25 cents for every dollar above the threshold. The thresholds are $150,000 for joint filers; $112,500 for single filers; and $75,000 for married filers filing separate returns. These levels have not been adjusted for inflation.

It has been estimated that more than 23 million taxpayers would have been hit by the AMT if the exemption amounts were not increased for 2007. As it is, about 4.2 million taxpayers will still be required to pay the AMT on their 2007 returns. Note: The new law was approved even though it did not include provisions to offset the $50 billion loss in revenue under the "pay as you go" commitment made by Congress.

Unfortunately, the new legislation was enacted too late for the IRS to incorporate the changes into its 2007 tax return packages so it could also delay the processing of refunds for some taxpayers (see right-hand box).

(Coming Up: Another New Law That Was Passed Recently and How it Affects Individual and Business Taxpayers)

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