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PAULSON: PUNT AMT TO 2008

October 04, 2007

It's October. Do you know if you'll pay alternative minimum tax this year?

If you don't know, you're not alone. 23 million taxpayers may or may not be subject to AMT this year, depending on whether Congress enacts another one-year "patch" to put off the day of reckoning.

The 2001 Bush administration tax cuts lowered the regular tax rates for individuals, but not the AMT rates. Also, the AMT isn't indexed for inflation, unlike the regular tax rate system. As you pay the higher of regular tax or AMT, the reduction of regular rates and the effects of inflation have threatened to add millions of taxpayers to the AMT system.

Congress has put off the AMT day of reckoning by passing temporary "patches" that have increased the amount of income exempt from AMT. The most recent of these expired at the end of last year. Unless Congress acts, millions of taxpayers face higher tax bills for 2007.

Yesterday Treasury Secretary Paulson urged the House Ways and Means Committee to pass another patch, according to a story by Tax Analysts ($link). Ways and Means Chairman Rangel has been wanting to craft a bill to permanently fix the AMT by just raising the regular tax -- a proposal that would be certain to draw a veto.

What will happen? I'm guessing another one-year patch. The AMT hits Democratic states the hardest; they tend to have high state income taxes, which are a common cause of AMT. It's hard to imagine Congressional Democrats allowing a big tax increase that hits their own voters going into an election year.

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