AMT

The Wall Street Journal’s Washington Wire blog offers a reminder about Alternative Minimum Tax fun ahead:

Among the many unfinished items on Congress’s agenda this year is a handful of tax policy issues including a short-term fix for the Alternative Minimum Tax, whether or not Congress will pass an additional economic stimulus package, and tax deductions for college tuition and state sales tax, among other items.

All three could pose a headache for the Internal Revenue Service if Congress doesn’t decide how to act before Election Day, preferably by October, IRS Commissioner Douglas Shulman said in a Wall Street Journal interview today.

You may recall that Congress’s indecisiveness over AMT lead to a bit of chaos this past winter.  We started off early tax season with thousands of middle-class taxpayers wondering if they were going to be hit with AMT.  Then a one-year reprieve was granted, and tax-processing was delayed while new forms could be generated and IRS computers reprogrammed.

I’ll be shocked if Congress acts in a timely matter on this subject.  However, it sounds like something that might be tackled during the lame-duck session after the elections.

Seen in the New York Times:

Congress on Wednesday gave final approval to a plan that will spare millions of middle-class taxpayers higher tax bills for 2007. The White House welcomed the development and said President Bush would sign the bill.

The tax reprieve postpones for one year only an expansion of the alternative minimum tax[....]

The vote on the alternative tax plan came on the final day of the first session of the 110th Congress, which ended with a burst of last-minute legislation including final adoption by the House of a $555 billion budget package.[...]

The Treasury secretary, Henry M. Paulson Jr., while thanking the House for approving the bill, warned that there would probably be some delays “including delays of some refunds.”

Changes in the tax code require substantial work, especially in reprogramming I.R.S. computers.

Officials said Wednesday that they could not project how many taxpayers might be affected by delays. Previously the I.R.S. had said that a delay in Congressional action until Christmas could stall as many as 38 million tax returns corresponding to $87 billion in refunds.

The I.R.S. said Wednesday that within 72 hours it would post on its Web site revisions to a dozen forms affected by the change.

Well, better late than never I guess. And hey, Congress gets to face this again next year, since it’s only a temporary restriction.

Geez, trying to do any sort of year-end tax planning is getting complicated. First, I was drafting a post on AMT reform having stalled in the Senate…and while writing, I hear that the Senate did actually move forward. From the AP:

The Senate voted Thursday to block a looming tax increase averaging $2,000 for millions of taxpayers after Senate Republicans succeeded in thwarting a Democratic plan to also raise taxes on investors.

The Senate bill, passed 88-5, provides a one-year fix for the alternative minimum tax but without matching the cost of the tax relief with new tax revenues. Without the fix, an estimated 25 million people would be subject to the higher AMT tax, up from 4 million in 2006.

The Senate vote puts it at odds with the House, where Democratic leaders, under a principle of not adding to the national debt, demanded that the AMT fix be paid for. Last month, the House passed legislation matching the AMT fix and other tax cuts with about $80 billion in new tax revenues.

Let’s see…and the IRS forms for 2007 tax filing were “finalized” a couple of weeks ago, right?

The Courant today has a story a story on the latest political antics surrounding AMT relief:

House members voted Friday to shield more than 23 million Americans from a tax increase this year under the alternative minimum tax - and hit up wealthy managers of investment firms such as private equity and hedge funds to pay for it.[...]

The debate now shifts to the Senate, where the tax increase is extremely controversial, including among some Democrats who have received big campaign donations from investors who would face higher taxes under the plan. The Bush administration has said it would veto a tax increase.

Meanwhile, the Internal Revenue Service has warned that action on the alternative minimum tax is required soon to prevent disruptions for 2007 taxpayers.

It’s good that Congress seems to be dead-set on ensuring that any revenue loss is offset somehow. However, I suppose it’s too much to hope that the idea of reducing spending would ever cross a congresscritter’s mind.

You’d think that with 2008 shaping up to be a nasty election year, elected officials would be bending over backwards to find a way to avoid angering millions of upper-middle-class taxpayers.

I suppose that, for them, it’s sufficient to gamble on being thankful that November is so far away from April.

A few thoughts from this morning’s Republican debate:

• Ugh.  Serious thought should not be required this early on a weekend morning.
   
• Brownback’s been engaged in robo-calling, which would be an instant disqualification if I were participating in the Iowa straw poll.
   
• Romney quote: “I’m tired of those who have been holier-than-thou because they’ve been pro-life longer than I have.”
   
• Giuliani does a good job of stating a rational pro-choice or at least pro-choice/life-neutral stance: seeking to reduce abortion but acknowledge that it’s inappropriate for the feds to be involved, and appropriateness is best left between a woman and her doctor.
   
• Paraphrasing McCain: “Quit debating abortion.  Stopping radical Islamic extremists is what’s important.”
   
• Wow.  Ron Paul actually sounded sane for a moment when talking about Iraq.  He got cheering from part of the crowd for leading off with “Just get out.”
• Brownback slams the Dems for not giving props to the troops in their “rush to the exit”.   ISTR that all the Dems made a point of at least attempting to commend the troops and their families for their service, even if they are “rushing for the exit.”
   
• McCain, Giuliani, and Romney all emphasize the need for a stable Iraq.  Sounds good, but it’d be nice to hear some new ideas about how to get there since one wonders if the current strategy is working.
   
• Romney on Obama’s Middle East / Terrorism policy: “In one week he’s gone from being Jane Fonda to being Dr. Strange Love.”
   
• Brownback on health care: “Either give every American the kind of health care that Congress has, or give Congress health care that normal Americans have.”  At least he wrapped up with acknowledging the cost challenges.
• Tancredo: “It’s not the responsibility of the federal government to provide womb to tomb health care for Americans”.   He moves on from there on what can be done to better enable Americans to take responsibility for their health care…but loses me when he uses health care as an argument to deport 12 million undocumented immigrants.
   
• Huckabee spends a couple of minutes seeming to argue that we’re spending too much attention overseas, when we should be fixing our own problems / setting an example domestically.
   
• Giuliani spends a couple of minutes reminding us that higher tax rates do not necessarily mean higher revenue.  Romney seems to correctly add on that part of the problem with crumbling domestic infrastructure is not the amount of money being spent, but where it’s being spent.   McCain gets a word in saying, simply, “end the pork barrel!” 
   
• Over an hour in and we get to some interesting debate, discussing income tax reforms, starting off with the “fair tax” (replace income/estates, etc. with a 23% sales tax).  Giuliani correctly points out that while simplification is desirable, but shifting over to a fair tax / flat tax is going to be nasty due to conversion issues.  McCain reminds us that AMT is going to become nasty

Overall, it seemed to be an OK debate.  Certainly not as entertaining as the CNN/You Tube dems’ debate, but what do you expect of a bunch of Republicans….although I do see some echoes in the form of video questions from normal citizens.

Stephanopolous was an excellent moderator, I think, doing a pretty good job of keeping the candidates on topic, keeping things moving, and at least attempting to bring in the second- and third-tier candidates when appropriate.

I have to give Ron Paul props for coming off more sane and less shrill.  Hopefully a couple of folks who may have thought libertarian ideas were nutty may start to revise their opinions.

And finally, I have to suggest that the GOP would be well-served to have a debate that focused primarily on topics other than Iraq and foreign policy.  While those subjects are certainly important, I think to win in ‘08, more energy needs to be spent on other subjects.   For example, this morning we saw some brief conversation on the pros and cons of alternative tax schemes versus the current bureaucratic mess we have now.  Perhaps some energy ought to be spent on educating Joe Average American on that debate, if they’d like to defend the country from the tax festival that could all too easily arise if the Dems succeed in gaining control of the White House in addition to maintaining control in both houses of Congress.

Over the weekend the New York Times ran an editorial calling for AMT reform when Congress reconvenes from its Memorial Day break:

True reform must lift the alternative-tax burden from wrongly afflicted taxpayers while enacting a fair way to raise tens of billions of dollars in annual revenue that will be forgone. President Bush has long promised a real fix but has never taken action. The truth is, Mr. Bush needs the alternative tax because the revenue it’s projected to generate masks the drain from the tax cuts he has lavished on millionaires. So reform will be up to Congress.

The editorial discusses the unfairness of the Bush tax cuts having shifted the federal appetite for revenue inappropriately from the rich to the middle class and poor — an argument I’m receptive to, but don’t necessarily agree with in its entirety.

However, there is I think a rather significant omission in the editorial. The writers’ emphasis is on the need to shift the AMT to preserve future revenue streams.

What ever happened to a more obvious solution — if you’re going to collect less in tax revenue, why not spend less?

The President’s
Advisory
Panel on Federal Tax Reform released their final
report today (the recommendations start in Chapter 5, in the second
file).

It’s a long document, one that I’ll read in great detail the next time
I can’t get to sleep; however I have a sense of the high points on
individual
taxes. (Note: I’m generally ignoring "Head of household" and
"non-child dependents" in the table below.)

There is a LOT of information in the report, including mockups of new
tax forms, more details on some of the points described above, as well
as a discussion on why plans on moving more to VAT or sales-tax funding
rather than income tax funding were discounted (the conclusion seems to
be messiness in implementation, risk of adversely impacting low- and
middle-income
families, and a transition period of increased revenues that would be
difficult to wean the government off of).

I do like the simplification of the alphabet soup of tax-advantaged
accounts,
although I’d go a step further and just have a single account that can
be tapped for any number of tax-advantage-worthy reasons. I did a little
letter-writing to that effect when SS personal accounts were being
discussed.
Nevertheless, this is a welcome change.

I also have to give props to the panel for satisfying their charge to
develop
a simplified tax system. It does look much simpler than the mess we have
now, and there seems to be some good thought put into the proposals…
better thought than I was initially expecting, anyway.

However, I have concerns that the panel glosses over the impact that
these
changes could have on individual families. There are also some charts
in the report that claim to demonstrate that the impact on many groups
of individuals will be negligible. However, writing as someone who lives
in a town where the hot issue in this year’s municipal elections was poor
communication about what last year’s revaluation was going to do to
individual
property tax bills (what was advertised as an average 5% increase was
really an average 11% increase; and my neighborhood saw 25-30% increases…)

…I’m not very trusting of those charts.

If I believe those charts, My wife and I will be seeing a slight
reduction
of my income tax liability; however if I crunch the numbers on my own…our
federal income tax jumps by about 57%. If I have time, I may put together
an Excel model this weekend, if someone doesn’t beat me to the punch.

If Congress does its job, there will be additional information released
on the relative effects of the proposed schemes on different states, and
on different municipalities within those states. They need to avoid just
looking at the averages; there needs to be a review done of how many
individuals
will see how much of a tax change (both in dollar and percentage terms),
and a bit of analysis performed to identify what sorts of families will
be adversely impacted by the changes…and why.

The changing of tax systems makes an interesting intellectual exercise,
and it should make for an incredibly amusing political spectacle.
Implementing
a new system should generate a lot of short-term business for financial
planners and tax specialists.

Meanwhile, I need to consider the implications on our household, so we
can act before the real estate market possibly goes
"poof".