Albert Einstein once remarked, “The hardest thing in the world to understand is the income tax.” Since Einstein’s admission, our tax code has only grown more complicated and now it is poised to force 20 million middle class Americans to pay an extra $65 billion in taxes over the next four years. And if the tax cuts of 2003 expire, a staggering 115 million taxpayers will be hit with a $1700 tax increase. One of the most pressing domestic priorities facing this extended Congress is passing legislation to address the alternative minimum tax (AMT) that will slap millions of Americans with new taxes.
Although many Americans may not be focused on tax day just yet, the ears of most tax-payers perk up at the words “alternative” and “minimum” used along with “tax.” By its name, many taxpayers might assume the AMT is a good thing. A simpler “alternative” to the complicated and overly burdensome tax code would be welcome news. The idea of paying a lesser or “minimum” amount of taxes sounds good, too. But the AMT is not simpler and it does not allow taxpayers to pay lower taxes.
To the contrary, the AMT denies taxpayers many important deductions, so that middle class families subject to AMT actually pay higher taxes. To make matters worse, Congress failed to index the AMT for inflation. So the AMT has not been adjusted to keep pace with the rise in income and cost of living. As a result, a tax that affected less than 369,000 taxpayers in 1994 could impact an additional 20 million taxpayers who will be burdened with an unexpected tax increase next April unless Congress enacts a refund fix this year.
If Congress does pass a tax refund fix, a family earning an income of $75,000, and paying $6,000 for day care for their four children, would itemize their child care deductions and receive a $6,189 refund. Without this fix, however, the family would receive only a $700 refund. That’s nearly a $6,000 difference. Even if the tax refund fix is enacted, Congressional inaction to date could delay the family’s refund until June – a delay that many working families cannot afford.
Similarly, with a tax refund fix, a single parent earning $50,000 a year, paying $6,000 annually for day care, and using standard deductions on her tax return, would receive a return of nearly $1,000. But if Congress continues to ignore the AMT problem, she would actually owe the IRS an additional $225 in taxes. A tax refund fix would save her and her family a total of $1,189.
Unfortunately, even if Congress passes a bill, we can expect problems. Months ago, Treasury Secretary Henry Paulson warned that any bill to fix the AMT would need to be sent to the President by November 16, allowing the IRS sufficient time to prepare and distribute instructions and update their computers to process tax returns next April. Many families’ tax refunds may be delayed up to 2 to 3 months because the tax forms will not be ready in time for tax season. This will affect families who take popular deductions and credits – including the child care credit, the adoption credit and the dependent care credit.
If Congress fails to act altogether, the AMT impact will be significant. Without a tax refund fix, the AMT will dig deep into the pockets of American families, who stand to lose $1,000, $2,000, $5,000, or more. Congress must act responsibly, and correct the AMT, which now threatens to encroach on the earnings of millions of middle class taxpayers.