AMT Repeal to Lead to Tax Increase?

Income Tax

From the N.C. State GiftLaw eNewsletter this week:

In January of 2007, Rep. Charles Rangel (D-NY) will assume the leadership of the House Ways and Means Committee. Chairman Rangel has indicated that alternative minimum tax (AMT) reform will be a high priority. Large numbers of taxpayers from his district in New York City have substantial incomes and now are subject to AMT.

During the past five years, Congress has repeatedly passed an “AMT Patch.” As more taxpayers have been subject to AMT, Congress has slowly and steadily increased the AMT exemption. However, with increasing numbers of taxpayers with higher incomes and reductions in top tax rates in 2001 and 2003, millions of American taxpayers are now facing alternative minimum tax.

Bills have previously been introduced in both the House and the Senate to repeal the AMT. If the revenues forgone by AMT repeal are calculated, the cost could potentially amount to a trillion dollars. Therefore, the major question on AMT repeal is whether or not to use offsets to create a “revenue-neutral” bill. “Revenue-neutral” is Washington language for a bill that will include some tax increases. Given the magnitude of the funds involved, the offsets may include higher rates for upper-income taxpayers.

Sen. Charles Grassley, who will be the ranking Republican on the Senate Finance Committee in January, issued a press release that warned about raising rates to pay for AMT repeal. He noted, “I hope the new Democratic leaders won’t fall into traps on AMT repeal, such as counting on the revenue that AMT raises for more Government spending. It’s ridiculous to rely on revenue that was never supposed to be collected in the first place. Another trap is raising taxes to pay for AMT repeal. It’s unfair to raise taxes to repeal something with serious unintended consequences like the AMT.”

Sometimes known as the “awfully mean tax,” the AMT involves a complex set of rules designed to ensure that high-income taxpayers pay their “fair” share of taxes. Personally, I don’t like seeing my itemized deductions being reduced because of AMT limitations. Even if I end up paying the same amount of tax due to tax increases, I support AMT repeal as small step in simplifying the tax code.

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