Time is running out for U.S. lawmakers to prevent millions of unsuspecting middle-income taxpayers from being hit with a tax meant for the very rich.
Congress broke for a two-week Thanksgiving holiday without passing legislation to exclude about 20 million taxpayers from having to pay the alternative minimum tax when they file their 2007 income tax returns starting in January.
Democratic leaders say there is no doubt lawmakers will pass temporary AMT relief when Congress returns in December.
But the legislation has become entangled in partisan bickering over federal spending, President Bush's tax cuts and the nation's $9 trillion debt.
"Millions Are Waiting"
"Millions of American families are waiting to see whether we'll protect them from this stealth tax," Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said in a statement.
"The IRS needs information to communicate to taxpayers as soon as possible."
The Treasury Department says Congress' failure to act earlier on an AMT reprieve could delay refunds. Taxpayers have until April 15, 2008 to file 2007 returns, but many, especially those due a refund, file as early as January. The agency says it needs time to print forms and update computer programs.
The AMT was enacted in 1969 to ensure the very wealthy did not take advantage of so many breaks that they paid no taxes.
But because of inflation and some past legal changes, the tax now looms over a growing number of middle income people.
If Congress fails to act, the tax could hit married couples without children earning as little as $75,000 a year. Because of the way the tax works, families with children are more likely to be captured by the tax at even lower income levels.
According to congressional researchers, a family with one child making just over $70,000 could end up paying the AMT, while a family with two children making just over $66,000 could end up paying.
The proposed relief would allow most families making less than $150,000 to escape the tax.
More Debt Vs. More Revenue
Full repeal cost the federal treasury about $800 billion over 10 years, so for years Congress has enacted temporary relief bills to hide the budget impact.
The U.S. House passed an AMT relief bill earlier this month with only Democratic support. Republicans opposed the bill which also raises taxes on private equity fund managers and limits the ability of hedge fund managers to defer income and taxes through offshore tax havens.
Bipartisan support is needed in the Senate where 60 of the 100 members must vote in favor to advance a bill. The private equity and hedge fund measures in the House bill are unlikely to pass the Senate.
Republicans argue there is no need to raise other taxes to make up for revenue losses from providing AMT relief. But Democrats say not doing so will add to the nation's debt.
Shortly before leaving for the two-week recess, Senate Democratic leaders tried to bring up a bill that included no revenue measures for the temporary AMT relief, which would cost the federal treasury roughly $50 billion. That bill also would have extended some expiring popular tax breaks, such as the research and development credit and college tuition deduction.
Republicans blocked that effort and countered with a proposal that included no revenue raising measures and an ability to offer amendments to extend some of Bush's tax cuts which are set to expire at the end of 2010.
Democrats blocked the Republican offer and Baucus promised that his tax writing panel next year would look at broader tax reform question and whether Bush's tax cuts should be renewed.