Patch Approved For Alternative Minimum Tax

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Thursday, December 20, 2007

Congress gave final approval yesterday to a bill that would protect about 20 million households from a tax increase caused by the alternative minimum tax, but the legislation passed so late in the year that 15 million Americans will probably have to wait longer than usual to get their refunds in 2008.

The House voted 352 to 64 to prevent middle- and upper-middle-income taxpayers from being hit by the AMT, which was designed in 1969 to target only the very rich. President Bush was expected to quickly sign the measure.

The Internal Revenue Service had urged lawmakers to act sooner, warning that the longer they waited to repair, or "patch," the AMT, the more disruption taxpayers would encounter when they filed their 2007 tax returns. The rules governing the AMT affect not only people who are forced to pay the levy but also almost all taxpayers who itemize deductions.

The IRS has said it needs seven weeks from the patch's enactment to adjust its computers to the change. Given the lag time, as many as 15.5 million tax refunds totaling $39 billion will be delayed next year, the IRS's oversight board has estimated. In other words, 11 percent of 140 million filers will probably have to wait a little longer to get their money back from the IRS.

"The filing season usually starts the second week in January," said William R. Fleming of PricewaterhouseCoopers, an accounting firm. But the delay in passing the patch, he said, "could cause a delay in early filing by as long as a month and a delay in getting refunds by the same period of time."

"The IRS is doing all it can to have a fully successful filing season," Treasury Secretary Henry M. Paulson Jr. said. "However, it is likely that there will be some delays, including delays of some refunds."

Still, lawmakers said they were glad to have finally repaired the AMT, at least for this year, and thus avoid the larger problem of imposing a tax increase on people who were never supposed to be subjected to one. The AMT imposes an average $2,000 tax increase on households that are required to pay it.

"The alternative minimum tax was never meant to ensnare middle-class taxpayers," said Rep. Wally Herger (R-Calif.), a senior member of the tax-writing House Ways and Means Committee.

"It is the end of the year, and we have an obligation to at least provide temporary relief to taxpayers for the 2007 tax year," said committee Chairman Charles B. Rangel (D-N.Y.).

Democrats had promised all year not only to fix the AMT but also to pay for revenue losses connected to the change. As part of their pay-as-you-go regimen, Democrats pledged to make up the patch's $50 billion loss by raising taxes or cutting spending. In the end, they did neither.

Many lawmakers, especially Democrats, bemoaned the failure. For several days, moderate House Democrats who call themselves Blue Dogs threatened to prevent Congress from acting unless the AMT patch was fully paid for. They relented after the Senate for the second time rejected a House-passed AMT patch that would have been paid for by tax increases on Wall Street financiers.

On Tuesday, the Senate rejected a House-passed AMT patch that would have covered its cost by closing offshore tax havens used by hedge fund managers. The Senate earlier rejected a House plan that would have increased the tax rate on managers of hedge funds and private-equity firms.

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