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Tax Law Change Addresses "AMT Patch"
By now, I am sure that some of you have heard the stories surrounding the most recent tax law change signed into law in late December 2007. The issue addressed is what has been referred to as the “AMT Patch”. The Alternative Minimum Tax, or AMT as it is commonly known, has been a subject of heated debate over the past months and a subject of discussion with some of you as well. In response to an overwhelming outcry for change, Congress passed this late tax law change in the hopes that it will remove millions of taxpayers from the reach of the AMT.
In short, the AMT is an alternative tax calculation which was intended to level the playing field between high income taxpayers who utilize acceptable tax law to reduce their income and pay less tax and the middle income taxpayers who are not able to use those same avenues for tax reduction and in some cases pay more tax as a percentage of their income. The AMT calculation is as follows:
- Several of the acceptable itemized deductions are added back to income, as well as other deductions, to arrive at Alterative Minimum Taxable Income (or AMTI).
- The applicable AMT exemption (the subject of the debate) is subtracted from the AMTI and a flat rate of tax is then assessed against the adjusted AMTI (either 26% or 28% depending on the income level and filing status).
- This alternative tax is then compared to the regularly calculated income tax and the taxpayer pays the higher amount.
The problem with this scenario is that the AMT has not been indexed for inflation and therefore more middle-income taxpayers are subject to it. The tax law previously in place before last week would have lowered the AMT exemption to the year 2000 levels, placing even more taxpayers at risk for incurring AMT’s wrath. The new law raises the exemption level to amounts higher than those in 2006, which should offer some relief to those otherwise affected.
The first unknown factor is the extent of the intended relief to taxpayers. We do not yet have access to the revised forms and cannot offer much comment on this. However, we can say that the tax estimates prepared by our office in December 2007 which were affected by the AMT could have different outcomes when we run the final returns later this filing season.
The second unknown is the date on which we will be able to submit final returns for affected taxpayers. IRS is indicating that as many as 13.5 million taxpayers will have to wait until February 11, 2008 to file their returns due to the changes in the tax forms. The following tax forms are currently under revision:
- 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
- Form 8859, District of Columbia First-Time Homebuyer Credit
- AForm 6251, Alternative Minimum Tax, Individuals
Electronically filed returns including these forms cannot be processed until at least February 11, 2008. The IRS is also advising paper filers utilizing these affected forms to wait and file their returns until that date as well. As always, IRS is urging electronic filing of final returns to accelerate refunds and cut down on the amount of paper received by their offices.
As with any tax law change, dates are tentative and due to the outstanding complexity of the AMT, we are hesitant to endorse a specific date for filing returns. However, we will keep you updated through our website and will certainly be willing to answer questions via phone or e-mail as they arise. Our advice to you is to bring in your tax information as you always have, and if we need to hold off on filing your return due to tax form changes, we will let you know as soon as possible.
