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US Treasury Urges Swift AMT Fix

by Mike Godfrey,, Washington

25 October 2007

The United States Treasury Department has told Congress that it is "critical" that a temporary fix to the alternative minimum tax is enacted by early November, to avoid confusion and delays come the 2008 tax filing season.

The Treasury's warning came in a letter to Sen. Chuck Grassley, ranking Republican on the Senate Finance Committee, who is leading efforts to get another one year 'patch' for the AMT system, in order prevent many millions of ordinary taxpayers having to file under it.

In the letter, Treasury Secretary Henry Paulson stated that if Congress fails to act in time, 25 million taxpayers will be subject to the AMT in 2007 - 21 million more than were subject to the tax in 2006. These taxpayers will face, on average, an increased tax bill of $2,000.

"For these taxpayers, failure to enact a patch for 2007 would result in a substantial unexpected tax increase," Paulson wrote. "Enactment of a patch beyond early November 2007 could also significantly delay processing of these taxpayers' returns and payment of any refunds," he added.

Paulson also pointed out that failure to enact the patch in a timely manner will affect the computation of various tax credits, such as the child tax credit and the retirement savings contribution tax credit, meaning that an additional 25 million taxpayers would face delay in the processing of their returns and the payment of refunds.

Historical filing patterns suggest that the enactment of an AMT patch in mid-to-late December could delay the issuance of approximately $75 billion in refunds to taxpayers who are likely to file their returns before the end of March 2008, Paulson told Grassley. On the other hand, enacting the patch before mid-November would result in significantly less compliance challenges for the IRS in the 2008 filing season, he added.

First enacted in the 1960s to ensure that the wealthiest 150 or so taxpayers couldn't use deductions and exemptions to reduce their tax liabilities to zero, the AMT was never indexed to inflation, and Congress has consequently had to legislate a series of temporary fixes to stop the system encroaching on the ranks of the middle-income taxpayers.

In response to Paulson's warnings, Grassley, who has dubbed the AMT "a complete policy failure" which must be repealed, told a new conference on Tuesday that: "We cannot be hitting these families – many who make less than a $100,000 – with an average new tax increase of $2,000 per family."

"We wouldn’t have to go through this song and dance now if we just repealed the AMT," he remarked.

"The Democratic leaders need to give the Finance Committee designated floor time to allow the Senate to consider and pass the AMT patch and an extenders bill by early November. Congress needs to take action now – otherwise one of the most frustrating days for Americans – April 15th – is going to be a whole lot worse," he concluded.

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