Alternative Minimum Tax

Alternative Minimum Tax Leaves Taxpayers’ Returns in Limbo Late Legislation Will Delay the Processing of Millions of Tax Returns; CEDAR RAPIDS, IA–(Marketwire - Most taxpayers who file their tax return early do so because they are eager to claim their anticipated refund. However, this tax season, as many as 50 million taxpayers who file their return early may be disappointed by how long it takes to get their expected refunds. The cause of the probable hold up? Lawmakers’ failure to approve a temporary patch to the Alternative Minimum Tax (AMT) — a parallel income tax system, implemented in 1969, designed to prevent 155 wealthy Americans from aggressively using tax credits, deductions and legal tax shelters as tools to help them avoid having to pay federal income tax. The AMT has become a topic of heated discussion among taxpayers and lawmakers alike because the AMT now reaches into the pockets of the middle-class. Regular income tax brackets are indexed for inflation, but AMT thresholds are not. Thus far, the full effects of the AMT have been deferred by Congress enacting a series of temporary patches — boosting the amount of the AMT exemption. However, the last temporary fix expired at the end of 2006. If Congress fails to ratify another provisional one-year increase within the next few weeks, the number of households paying the AMT will jump from approximately 4 million in 2006 to nearly 23 million for 2007. Another 27 million filers, who claim a variety of credits connected to the AMT, are also projected to feel the sting of increased taxes as a number of these credits (i.e. child and dependent care, education, residential energy and state/local taxes) have not been extended to 2007. When Congress reconvenes from Thanksgiving Break, lawmakers will only have a few days to pass a bill into law before adjourning for Winter Break. Assuming parties can come to terms and the passage of last minute legislation is made to happen, the news is both good and bad for taxpayers. The good news: it’s expected the AMT exemption will receive a boost for 2007 as compared to the year prior. Similarly, several credits and deductions are also expected to be extended for the coming tax season. The bad news: there will likely be major delays in processing your refund due to the late changes. The IRS, which was recently up against a hard deadline to have its forms sent to the printer by mid November, has decided that the IRS’ forms shall be in accordance with the laws as they stand today — assuming no patch for the AMT and that a number of deductions and credits have expired. Late legislation means the IRS will need to roll out new forms and instructions as well as make programming changes to its computer systems that are used to process tax returns — in all taking approximately 10 weeks after the bill is signed into law. That means, even if Congress passes a change to the bill, an estimated 50 million filers, who would have been affected by the AMT and other expiring credits and deductions (totaling $75 billion in tax refunds), will be faced with processing set backs. Worse yet? Millions of other filers who are not impacted by the AMT may also face delays due to the backlog in processing returns. The best advice a taxpayer can follow this year: find out early if the AMT affects you and use e-file. For a number of years, the percentage of filers submitting their tax return electronically to the IRS has shown increases in the double digits largely because it’s convenient, secure and reduces the opportunities for common filer mistakes.