AMT Patch Legislation

Current status and outlook

Updated December 21, 2007

Following another failure to break the stalemate in the Senate, the Democratic leadership in the House is reported to have agreed to bring a stripped down version of the legislation to a vote.

Use this page to keep on top of developments concerning legislation designed to prevent an increase in the number of people paying AMT.

The issue
Who's affected
Impact of delay
The politics
Recent events
What's next

The issue

In recent years Congress has passed "AMT patch" legislation every year or two to prevent the alternative minimum tax from applying to a vastly increased number of taxpayers. (A wag at the Tax Policy Center suggests Congress has become addicted to the patch.) Protection under the most recent version of this law expired at the end of 2006. Unless Congress extends this relief, an additional 20 million taxpayers will find themselves owing AMT this year. Another 4 million or so will pay AMT in any event, but will pay a larger amount without the patch. The total amount of tax involved is huge, some $50 billion for a single year.

Who's affected

The direct effect of the legislation is on people who will pay AMT, or pay more AMT, or lose tax credits because of the AMT, if Congress doesn't act. For the most part these are upper middle class taxpayers, especially those with a large number of dependents or those paying a large amount of state and local tax. Generally speaking, people with low to moderate income are not affected because they are protected from paying AMT even if the legislation does not pass. People with very high income are also unaffected because the principal benefit of the legislation is "phased out" for high-income taxpayers.

Impact of delay

Millions of other taxpayers may be affected in another way. A retroactive change in the tax law this late in the year will hamper IRS efforts to get the tax filing season under way, even for taxpayers who do not pay AMT, because of the need to reprogram their computers before they start processing returns. People who file their tax returns early, seeking to obtain their refunds as soon as possible, may find that the refunds are delayed. The IRS has said the reprogramming effort will take six weeks, and the scheduled start of the filing season is already less than six weeks away.

The politics

Democrats and Republicans agree on the need for an AMT patch, but disagree about other provisions in the legislation. The issues revolve around the "paygo" principle and the specific provisions used to comply with that principle.

Paygo. Pay-as-you-go rules, called paygo for short, make it harder to pass legislation that will increase the federal budget deficit. To comply with the rules, a law that cuts taxes must also raise taxes somewhere else. Republicans say paygo is a bad idea because it places obstacles in front of a genuine tax cut. In any event, they say, paygo shouldn't apply in this case because Congress never intended to collect AMT from these taxpayers. Democrats say a tax cut that increases the budget deficit merely produces a greater burden on future taxpayers, and point out that Republicans have relied on future AMT revenues in their budget projections.
Carried interests. One of the provisions House Democrats included in their first version of this legislation to comply with the paygo rules would require managers of certain investment funds to treat income from "carried interests" as ordinary income. This income represents compensation for managing the fund, but much of it is currently taxed as long-term capital gain, permitting the recipients to pay a lower tax rate on their compensation (which sometimes soars into the tens of millions of dollars) than the rates paid by ordinary wage earners. Opponents of this change generally have not defended the low tax rate paid on this compensation, but argue that there will be an indirect impact on investors if the fund managers charge higher fees to make up for having to pay higher taxes. Opponents also say this isn't an appropriate offset for this legislation because the AMT patch is a temporary tax break but the change in treatment of carried interests is permanent. Proponents argue that any indirect impact on investors would be microscopically small and the measure is needed as a matter of basic fairness. There's an undercurrent of special interest influence as the people who would pay this tax have made substantial political contributions to members of both parties.

Recent events

The House of Representatives passed a version of the AMT patch legislation that complies with the paygo rules, but Senate Democrats were unable to break a filibuster by Republicans. Senate Democrats then approved a stripped down version of the legislation that does not include the offsets.

Democrats in the House initially refused to accept the result, and passed another version of the legislation that drops the carried interest provision but continues to comply with paygo by using other offset provisions. After another delay, the Senate considered the measure again with the same result as before.

Acting on the final day of the 2007 legislative session, the House approved the stripped down version of the law, adding $50 billion to the deficit.

What's next

The IRS has promised to move forward as swiftly as possible with changes needed to process tax returns in accordance with this change in the law. Some delays in the processing of the earliest returns are anticipated.