It's Patch Time for AMT

It was both good news and contributed to my apprehension to see the bi-partisan pledge to pass the AMT patch.  This patch is designed to adjust for inflation an essentially incomprehensible tax that is supposed to prevent millionaires from sheltering too much income.  It became law in 1969 without any adjustment feature, and that creates the need to repeatedly do something in Congress or create a situation where people who are far from millionaires end up paying extra taxes.  So far this year there's no legislation that addresses this issue, and since we're running out of days left in the year, the  Congressional leadership decided to issue this pledge.

The pledge is better than nothing, but it seems like it would have been easier to just pass the legislation in a timely manner.  Of course if there is a problem with getting the legislation passed, then this pledge looks like nothing more than good intentions.  And we know what road is paved with those.

The issue is not a small one.  A report released last week by the Congressional Research Service quotes the Tax Policy Center as projecting that without the patch, the number of taxpayers with small business income who fall into AMT will be higher than those who don’t.  This same report shows that sans patch the amount of small business income (this is the dollars not the people) that is taxed will be 4 times the amount that is taxed at the 36% bracket.  I don’t want to dismiss the Bush tax cut discussion around small business, but in terms of impact the AMT patch issue seems more important to business owners.  (Presumably people who sit on the tax related committees of Congress are thinking along the same lines, which prompted the “pledge”). 



If the proposed legislation passes, it would allow for personal credits against the AMT and the exemption amounts for 2010 to be set at $72,450 for those married filing jointly and $47,450 for individuals.  Without the patch legislation the exemption falls to $45,000 for joint filers and $33,750 for single filers.   

The Tax Policy Center blog points out that this waiting until the last minute is not new behavior. In fairness making the decision to add the patch will cost the government serious money. No patch and the result should be about $90 billion in total taxes. The Tax Policy Center estimates that about $70 billion of that goes away if the patch is in place. So you can see where there some natural foot dragging associated with passage. Still for those of us paying the tax (if there no patch the Congressional Budget Office estimates that 20 percent of all taxpayers and 40 percent of married couples will fall into AMT) the idea that this tax only impact millionaires makes this more of a foot stomping exercise.