Congress Passes AMT Patch and More Year-End Tax Legislation

Congress passed a much-anticipated AMT patch and foreclosure relief shortly before its holiday recess along with many other tax-related bills. Practitioners can use the following Client Letter to inform clients about the patch and the other new tax acts and invite them to contact their offices for more details.

The AMT patch is a temporary fix to a big problem. Nearly 40 years ago, Congress created the AMT so that a handful of very wealthy taxpayers would not avoid taxation. The idea worked well at the beginning but over time inflation has eroded the value of the dollar. That handful of very wealthy taxpayers has grown to be many millions. Even more taxpayers, especially taxpayers with household incomes of between $75,000 and $100,000, would have been liable for the AMT this year but for the patch. The Treasury Department predicted that without the patch, up to 25 million taxpayers would face an average tax increase of $2,000 for the 2007 tax year.

The patch prevents the AMT from spreading by giving taxpayers higher exemption amounts and allowing them to use most nonrefundable personal credits to offset AMT liability for the 2007 tax year. The 2007 AMT exemption amounts are $44,350 for single taxpayers and heads of household; $66,250 for married couples filing jointly; and $33,125 for married couples filing separately. These amounts are slightly higher than the 2006 exemption amounts, which is also good news for many taxpayers.

The new law allows taxpayers to use most nonrefundable personal credits to offset AMT liability. These include the HOPE and Lifetime Learning credits and the District of Columbia first-time homebuyers' credit. The adoption, child and saver's credits were already allowed under prior law to the full extent of a taxpayer's regular tax and AMT.

2008 filing season

The IRS needs time to reprogram its computer systems for the patch. According to top IRS officials, the agency could need as many as seven to 10 weeks to reprogram its systems for the patch. The start of the 2008 filing season is already less than seven to 10 weeks away. Consequently, return processing and refunds could be delayed. The IRS has promised to get its computer systems reprogrammed as quickly as possible and to ensure that they process returns with 100 percent accuracy.

Some filers may have to wait until February 11, 2008 to file their returns, the IRS has indicated. Everyone else, according to the IRS, should not experience delays. We'll monitor the latest news from the IRS and keep you updated. The IRS has already revised many of the 2007 tax forms that are impacted by the AMT patch.

According to the IRS, taxpayers filing the following forms may experience delays. The forms are Form 8863, Education Credits; Form 5695, Residential Energy Credits; Form 1040A Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers; Form 8396, Mortgage Interest Credit; and Form 8859, District of Columbia First-Time Homebuyer Credit. Additional forms are affected by the AMT patch but the IRS has indicated that it has successfully reprogrammed its computer systems to begin processing those forms.

The IRS Oversight Board has estimated how long potential delays may be and how many taxpayers will be affected. The Oversight Board is a group of individuals that do exactly what their title says...they oversee the agency. According to the Oversight Board, if the filing season starts on January 28, 2008, approximately 6.7 million tax returns will be delayed and $17 billion in refunds will not be issued. If the filing season starts on February 4, 2008, roughly 15 million tax returns will be delayed and $39 billion in refunds will not be issued. If the filing season starts on February 18, 2008, nearly 38 million tax returns will be delayed and $87 billion in refunds will not be issued.

Calculating the AMT is far from simple. In fact, it is one of the most complicated provisions in the U.S. Tax Code. The patch is also very complex. Our office is ready to help you. If you have any questions about the patch and AMT liability, please call HLB Gross Collins at 770-433-1711.