Leaders from both parties in Congress vowed Tuesday to spare more than 21 million taxpayers from significant tax increases when they file their returns next spring by adjusting the alternative minimum tax before the end of the year.
The tax was first enacted in 1969 to make sure higher-income taxpayers could not use deductions and credits to avoid paying any federal income tax. The income limits, however, were not indexed for inflation, so Congress routinely fixes the AMT each year to spare millions of middle income taxpayers from tax increases that would average about $3,900.
Congress hasn't made the change for 2010. In a letter to the IRS, Democratic and Republican leaders of the tax-writing congressional committees said they would address the issue after Congress returns next week in a lame-duck session.
The letter is a bipartisan gesture on taxes just days before Congress takes up the much larger issue of extending tax cuts enacted under former President George W. Bush. The Bush tax cuts expire at the end of the year. Congress returns next week, and the tax cuts are among the top issues lawmakers will face.
The alternative minimum tax is a much more routine, but nevertheless important, issue. Patching it for one year would cost about $70 billion, according to congressional estimates.
"We will work to craft the AMT provision so that, in the aggregate, not one additional taxpayer faces higher taxes in 2010 due to the onerous AMT," said the letter, written by Sen. Max Baucus, D-Mont., Sen. Chuck Grassley, R-Iowa, Rep. Sander Levin, D-Mich., and Rep. Dave Camp, R-Mich.
"We urge the Internal Revenue Service to take all steps necessary to plan for changes that would be made by the legislation."
Baucus heads the Senate Finance Committee and Grassley is the ranking Republican; Levin heads the House Ways and Means Committee and Camp is the ranking Republican.
The lawmakers were responding to a letter from IRS Commissioner Doug Shulman, who said the later Congress passes legislation affecting taxes for 2010, "the more strain it would have on the IRS's limited resources."
"If an AMT patch is not enacted until late this year, it is likely that the IRS would need to delay the ability of millions of AMT taxpayers to file their tax returns and access any refunds that may be due," Shulman wrote.
On Tuesday, the IRS issued a statement saying the lawmakers' assurances "will be very helpful."
In 2009, the alternative minimum tax affected individuals making more than $46,700 and married couples making more than $70,950. The four lawmakers said they will write legislation that essentially updates the incomes levels for 2010 to account for inflation.
Without a fix, taxes would go up for individuals making as little as $33,750, and married couples making as little as $45,000. The tax increases would average about $3,900, but they would vary greatly, depending on income, filing status and deductions.
For example, a married couple making $85,000 a year with two college-age children would see a $4,500 tax increase if the AMT is not patched, according to an analysis by The Tax Institute at H&R Block.
A married couple making $100,000 a year with two young children would see a tax increase of more than $6,100, according to the analysis.
Kathy Pickering, vice president of The Tax Institute at H&R Block, said the tax giant will be ready to process returns, regardless of what Congress does. However, she said, it is difficult to help clients plan their taxes with so much uncertainty in the law.
"We're going to be ready. We've been doing this a long time and we know about the uncertainty," Pickering said. "But what we need to be able to do is counsel our clients."
(This version corrects that without an AMT fix, taxes would go up for married couples making as little as $45,000, not $45,700.)
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