Who Is To Blame?

Nearly 13.5 million taxpayers (myself included among them) will have to wait at least until February 11, 2008 before we are even allowed to submit our federal income tax returns to the IRS. This comes as a result of the congressional delays in passing a one-year patch to the Alternative Minimum Tax (’AMT’).

The AMT came into existence in 1970 to prevent the wealthiest American families from using deductions and exemptions to reduce their income tax liability. As recent as last year, the IRS has reasonably concluded the AMT is the single-biggest problem with the Internal Revenue Code. There are two core problems, the AMT was never designed to be indexed to inflation, so every year Congress passes a one-year patch to the tax and never gets back around to fixing it, and the AMT now impacts millions more people then the original 150 families it targeted in 1970.

The solution is simple: repeal the tax, and if necessary, replace the tax with an add-on tax of four percent of adjusted gross income above $100,000 for singles and $200,000 for couples. The thresholds would of course be indexed for inflation, as they should have been with the original AMT.

The angering dilemma is that several forms used by taxpayers are impacted by the AMT patch passed by Congress shortly before Christmas. If any of these forms look familiar to you, expect serious delays in your tax-filing and refund:

• Form 8863, Education Credits (Hope and Lifetime Learning Credits)
• Form 5695, Residential Energy Credits
• Schedule 2 to Form 1040A, Child and Dependent Care Expenses
• Form 8396, Mortgage Interest Credit
• Form 8859, D.C. First-Time Homebuyer Credit

The IRS estimates the delay will effect 13.5 million people. I disagree. These forms are generally filed by parents of students enrolled in college/graduate school (or in my case, the graduate student themselves), people who have installed an energy-efficient home heating/cooling system or some other form of energy-friendly improvement, those who claim expenses for care of young children, and people who have a residence (and one extra home) which they paid less than a combined $1.1 million for and have a mortgage on. I would estimate these forms impact many more than 13.5 million people.

I agree with the Taxgirl, this problem was not created by the IRS–in fact, they’ve recommended time and time again that a permanent solution is needed to the recurring AMT problem. Without even addressing the fact that Congress’ patch cost the government $50 billion in lost revenue, this just adds a special gloss to the notion that we need to elect stronger leaders who are less susceptible to the push and pull of Hill lobbyists.

This is a serious problem that needs permanent fixing, not just a yearly band-aid. To those of us who are tax-conscious, this should make the ongoing presidential race much more interesting.