Print this issue
Send your comments

Taxpayers had better start calling Congress if they don't want to get hit with an unexpected $5,698 tax bill in April 2008. Once again, the problem is the Alternative Minimum Tax.

The AMT was created to make sure rich folks with lots of exotic tax shelters paid at least some tax. But now it makes millions of families, most of them upper-middle income, pay extra, punishing them for such tax shelters as kids.

Once your income puts you in AMT territory, you figure your liability the regular way, then the AMT way, and pay whichever bill is higher. In the AMT calculation, you aren't allowed certain deductions (for dependents, for state and local taxes, for instance) but get a larger standard deduction, which is known in AMTspeak as the AMT exemption. To make matters even more uncertain, since 2001 Congress has been constantly changing the amount of this AMT exemption.

The last temporary increase in the exemption expired at the end of 2006. As the law stands now, the 2007 exemption has reverted back to 1986 levels--that's $45,000 for a married couple filing jointly and $33,750 for an individual filer. No one in Washington expects that to happen, since it would force the number of families paying AMT to quintuple from 4.2 million for 2006 to 23 million for 2007. But exactly what will happen with the AMT for 2007 is anybody's guess. Guess wrong and you could end up paying a big tax bill, plus possibly penalties, come next April.

President George W. Bush's 2008 budget proposes a one-year increase in the AMT exemption amount for 2007 to $65,350 for a married couple filing jointly and $43,980 for individual and head of household filers. Without that change, a couple could owe 28% on the difference between the proposed and existing exemption amounts--or $5,698.

What about Congress? The House Ways and Means Committee's Subcommittee on Select Revenue held two hearings last month on the AMT. In one, lawmakers listened to individual taxpayers' tales of AMT woes. To show how much they empathize, chairman Richard Neal, D-Mass., opened the second hearing with this bad news: "The AMT means no contribution for retirement, no savings for college and no trip to Disney this year."

OK, we get it. The politicians feel our pain. But when will they act and what will they do?

Mark Luscombe, principal federal tax analyst for CCH, a Wolters Kluwer unit in Riverwoods, Ill., predicts "the doomsday scenario" of tens of millions paying AMT will get postponed again, with another one-year patch. History is on his side: Congress passed four years of AMT relief in 2001, tweaked that in 2003 and then passed a one-year reprieve for 2005. So last April, taxpayers faced the same quandary as this year.

In May 2006, as part of a big tax bill extending the 15% top tax rate for capital gains and dividends through 2010, Congress adopted the 2006 AMT patch.

"It's unlikely we'll get an answer as early as May this year because there is no obvious (legislative) vehicle to move the idea," says Mel Schwartz, who follows legislation for Grant Thornton's national tax practice in Washington, D.C. He guesses the issue is likely to drag on through the summer or fall.

One reason this is likely to drag out is that some in Congress are still hoping to pass a permanent "fix" to the AMT problem, as opposed to another one-year patch.

Rep. Charles B. Rangel, D-N.Y., chairman of the House Ways and Means Committee, has said he wants to revamp the AMT. But Democrats' commitment to "pay go" rules--meaning they must pay for any tax cuts with tax hikes--will make that difficult.

Rangel's tax-writing counterpart in the Senate, Finance Committee Chairman Max Baucus, D-Mont., has already conceded a permanent fix isn't likely until after the 2008 election. He is focusing on a two-year patch.

With such uncertainty, how should you approach paying 2007 estimated taxes?

If you guess that at least an AMT patch will be passed and you're wrong, you could face not only an extra tax bite in April 2008 but also a penalty for underpaying your estimated tax. "Nobody likes to get a bill in the mail for additional interest and underpayment penalties," says Jeffery Kelson, a CPA with Amper, Politziner & Mattia in Edison, N.J.

One defense against the underpayment penalty is to make sure that your tax payments for 2007 (from withholding plus estimated-tax payments) add up to at least 110% of your 2006 tax bill. Yet, if your income is about the same as last year, this approach could leave you with a big refund next April. That means you'll have made an interest-free loan to the government.

"Owing (at least some) taxes on April 15 is a good thing," says Donald Williamson, a tax professor at the Kogod School of Business at American University in Washington, D.C. "You effectively had use of the money all year. Of course, that doesn't relieve the taxpayer if they have a big bill in April 2008 and don't have money in their checking account." Or if they owe an underpayment penalty.