Minimum Tax Could Apply to Millions More

Senate Majority Leader Bill Frist (R-Tenn.) said Tuesday that Congress had run out of time this year to act on legislation that would have saved millions of taxpayers from the grasp of the alternative minimum tax in 2006.

The tax was created decades ago to prevent the wealthiest citizens from sheltering most of their income from the Internal Revenue Service. But because inflation has driven wages higher over the years, it increasingly threatens more taxpayers considered to be middle class, with incomes of $50,000 to $75,000.

The nonpartisan Tax Policy Center has said that 3.5 million taxpayers will be subject to the alternative minimum tax, or AMT, on their 2005 returns. If there is no change in the law before the end of the year, the AMT will apply to about 15 million additional taxpayers in 2006, because steps taken by Congress to limit the number of people affected by the tax expire Dec. 31. Congress can still take action next year to provide them with relief retroactively.

The AMT requires many taxpayers to compute what they owe to the Internal Revenue Service twice: once using the traditional system, with deductions and tax credits; and again using the AMT system, which exempts a specified amount of income from taxation ($58,000 for married couples filing jointly, $40,250 for singles) and eliminates most deductions and credits, but imposes a slightly lower tax rate. Taxpayers pay whichever tax bill is higher.

The discussion of the AMT is caught up in negotiations between the House and the Senate over two widely different versions of tax-cut legislation that affect revenue over five years. The Senate proposed a single bill that would cut taxes by at least $58 billion; the House passed four measures that would cost the government $94 billion in lost revenue.

The Senate bill would provide relief from the AMT, whereas the House’s most expensive proposal would extend tax cuts on dividends and capital gains for two years. Extending those cuts, which are scheduled to expire in 2008, is a priority of House Republicans.

The House also favors curbing the AMT, but it included language to that effect in a separate bill.

Frist told reporters that the Senate, which returned to work Tuesday after a three-week Thanksgiving recess, did not have enough time before the year-end holidays to complete work on legislation providing relief from the AMT.

Most Senate Republicans would prefer the House’s extension of lower rates for investment income.

Eric Ueland, a spokesman for Frist, said the majority leader had “made it crystal clear that these provisions ought to be in the final version of the tax bill.”

But it remains unclear whether such a bill could win a majority in the Senate. The tax breaks for capital gains and dividends have little or no support among Democrats, and Republicans might not be able to get 51 of their 55 senators to support them.

All of this makes for extremely complex negotiations as the House and the Senate try to forge compromise tax legislation and give themselves a few days off before the holidays.

Congress also faces other complex tasks, including reaching a compromise on very different House and Senate versions of legislation to cut at least $35 billion over five years from federal benefit programs.

Frist told senators Tuesday that they should be prepared to stay in session Saturday -- and perhaps next Monday and Tuesday.