Congressional failure means higher taxes for many

    As many as 17 million Americans begin the new year facing the possibility of sharply higher federal income taxes in 2006.

    Because Congress has not yet intervened, the number of taxpayers
    affected by the Alternative Minimum Tax could soar to 20 million or
    more. Many of the new victims could see their federal tax burdens grow
    by several thousands of dollars.

    Congressional leaders say that
    will never happen, pledging that the House and Senate will pass
    remedial legislation early next year limiting the growth of this surtax
    to a much smaller number. But there’s no assurance this will occur, in
    part because some in Congress have other priorities, such as pushing
    tax preferences for capital gains and dividends.

    As a result,
    there’s at least a chance that millions of Americans are in for a rude
    awakening on the tax front, and that some of them won’t find out about
    it until they file their returns in 2007.

    Maggie Doedtman, a tax
    preparation expert for H&R Block in Kansas City, Mo., says the
    Alternative Minimum Tax constitutes a major surprise for a growing
    number of taxpayers.

    “People think of this as something that
    should just not happen to them,” says Doedtman. “Even if Congress does
    another short-term patch, the number of people affected by this will
    continue to grow.”

    Becoming subject to the Alternative Minimum
    Tax can be downright disagreeable. The average tax per AMT payer was
    about $4,000 last year, and it’s not unusual for first-time payers to
    take a four-figure hit.

    The fact that nearly 4 million taxpayers
    are expected to find themselves subject to the AMT for 2005 is a far
    cry from what creators of the tax intended a quarter-century ago. The
    parallel tax system was aimed at a few hundred Americans who were using
    multiple tax write-offs to avoid paying any federal income tax.

    The AMT addressed the problem by eliminating major categories of tax
    deductions such as state and local taxes, health costs and personal
    exemptions, then recalculating tax liability under a different formula.
    In the early years only a few Americans saw their tax bill go up as a
    result of the AMT.

    But, unlike the main tax system, the AMT was
    never indexed for inflation. As a result, its reach has gradually
    grown, and would have expanded even faster but for temporary fixes by
    Congress in recent years. Now, with Congress failing to act on a patch
    covering the 2006 tax year, millions enter the new year unable to
    predict their federal liability.

    According to the Congressional
    Budget Office, the AMT hits hardest on those with adjusted gross income
    of $100,000 to $500,000. Already, well over half the families and
    individuals earning $200,000 to $500,000 are taxed under AMT, the CBO

    But the new AMT targets aren’t just the affluent. In
    recent years the surtax has affected those in increasingly lower income
    brackets, in some cases for the simple reason that a large family is
    unable to use its multiple personal exemptions under AMT. About 10
    percent of tax returns showing incomes of $75,000 or less are now
    subject to the tax, according to the IRS; by 2010, that number is
    projected to exceed 20 percent.

    Political leaders vow that won’t happen.

    “What we want to do is make sure that it doesn’t hit more middle-income
    Americans,” said Scott McClellan, President Bush’s spokesman.
    Republican Sen. Charles Grassley, chairman of the Senate Finance
    Committee, has vowed to get AMT relief “enacted into law.”

    But there’s no guarantee that will happen, or that Congress will find the money to fully fund it.

    For one thing, the cost of making these temporary patches is growing
    rapidly, to roughly $30 billion in 2006. Between 2005 and 2010, tax
    revenue generated by the AMT is projected to increase five-fold,
    dimming hopes for eliminating the tax.

    Perhaps as important,
    some see the Alternative Minimum Tax as leverage for achieving higher
    priority aims. Republican leaders in the House, for example, omitted an
    AMT fix from their prime tax-cut measure this year in favor of a
    provision extending lower rates on capital gains and dividends. (They
    then advanced the AMT legislation in a separate measure, though it
    stalled in the waning days of December.)

    Some Republicans hint
    that permitting a rapid expansion of the AMT bite might also build
    support for a more fundamental overhaul of the federal tax system.

    “Might it not help the momentum on tax reform if a few more people
    fully understood the impacts of AMT?” said Rep. Bill Thomas, chairman
    of the House Ways and Means Committee.

    Sooner or later, many
    people think the AMT ultimately will force such as a reckoning. By
    2013, according to one scenario, the AMT will be collecting more tax
    revenue than the regular tax system.