Baucus Includes Permanent AMT Relief In Middle Class Tax Relief Bill

by Mike Godfrey, Tax-News.com, Washington

31 March 2009

Senate Finance Committee Chairman Max Baucus has announced legislation that would permanently index the alternative minimum tax (AMT) to inflation as part of a package of tax relief proposals aimed at helping middle America through the recession.

The Taxpayer Certainty and Relief Act of 2009 would also make existing tax breaks permanent for families and individuals including the child tax credit, marriage penalty relief, and lower middle-income tax rates, and provide permanent relief from the estate tax, among other provisions. Most of these measures were originally passed as part of tax legislation in 2001 and 2003, but are set to expire in 2010.

Montana Democrat Baucus unveiled his proposal after a Finance Committee hearing on March 26 that examined the effect of the current economy and the US tax code on America’s middle class. Original co-sponsors of the Baucus legislation include Senators Jay Rockefeller and Charles Schumer, both Democrats.

"These measures are not excessive or outrageous, but timely and targeted, and will build on earlier efforts to stabilize the economy,” said Baucus. “By guaranteeing a little extra cash in the pocket of working moms and dads, and by making sure that the AMT and the estate tax can move with the economy, we avoid sweeping tax increases for millions of American families."

Perhaps the most significant element of Baucus's legislation is the proposal to permanently protect more than 20 million Americans from being hit by the AMT. Enacted more than 30 years ago, this parallel tax system was designed to prevent a few wealthy taxpayers from reducing their tax liability to zero through the use of various deductions. However, Congress in its wisdom has never indexed the tax to inflation, meaning that it has to be routinely 'patched' to avoid those on relatively modest incomes falling into the system.

For the 2009 tax year, the American Recovery and Reinvestment Act provided a patch for the AMT, setting the exemption amount at USD46,700 (individuals) and USD70,950 (married filing jointly), and allowed the personal credits against the AMT. When this patch expires, the exemption amounts will return to USD33,750 (individuals) and USD45,000 (married filing jointly) and the personal credits will not be allowed against the AMT. The Baucus bill would make the 2009 exemption levels permanent and index them for inflation. In addition, the proposal will permanently allow the personal credits against the AMT.

Further, the new proposals would lock in 2009 estate tax rates and permanently index them to inflation. Under current law, US citizens and residents must pay taxes on transfers of property both during life and at death. These taxes are due under three separate tax systems: the estate tax, the generation-transfer skipping tax, and the gift tax. Currently, the top tax rate for all three taxes is 45%. Both the estate and generation-skipping transfer taxes currently have a USD3.5m exemption for individuals (USD7m for couples). The gift tax has an exemption of USD1m (USD2m for couples). For the 2010 tax year, the estate and generation skipping transfer taxes are repealed. In the same year, the gift tax rate will fall to 35%. In 2011, the estate, generation skipping transfer, and gift taxes are scheduled to revert back to pre-2001 levels, with an exemption of USD1m, a 55% rate, and a 5% surtax on large estates.

Baucus proposes to make permanent the 2009 estate, gift, and generation skipping transfer tax laws going forward and index the exemption amount. The proposal would also reunify the estate and gift taxes. In addition, the proposal would allow portability of exemption for spouses.

Other key elements of the Baucus bill include:

• A measure to make permanent the 10, 25, and 28% individual tax rates, as established by the Economic Growth and Tax Relief Reconciliation Act of 2001.
• For taxpayers in the 10, 15, 25, and 28% tax brackets, a proposal to make permanent a reduced tax rate on capital gains and dividends, as established in the Jobs and Growth Tax Relief Act of 2003 and extended by the Tax Increase Prevention and Reconciliation Act of 2005.
• Permanence of the income eligibility threshold for the child tax credit, recently set at USD3,000 by the American Reinvestment and Recovery Act of 2009, to give families up to USD1,000 for every child under age 17.
• Permanence of the marriage penalty relief provision, so that married couples will not be taxed more severely filing jointly than they would as two single persons filing separately.
• A permanent 45% credit rate for the refundable earned income tax credit for lower wage taxpayers with three or more children, as passed in American Recovery and Reinvestment Act of 2009.
• Permanent expanded assistance for families that adopt a child including a USD10,000 tax credit per eligible child.
• A permanent the 35% credit rate for child care expenses up to USD3,000 for one child and USD6,000 for two or more children.

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