A plan approved by Congress this week would free 20 million people of the Alternative Minimum Tax (AMT), and it’s also good news for bondholders who invest in “private activity” bonds, whose income is included in calculations of AMT liability.
The AMT provisions, contained in the Congress Budget Resolution, are aimed at short-term relief for taxpayers next year as they prepare their 2007 tax returns. Meanwhile, Congress intends to grapple with a long-term solution.
The Congressional Budget Resolution is enacted annually by Congress as an overall spending blueprint. The resolution is passed by both the House and Senate but not signed by the President. It serves as a statement of Congressional priorities to guide the appropriations and tax-writing committees in Congress as they set to work on individual measures to translate those priorities into law. Appropriations bills and tax measures must be passed by Congress and signed by the President prior to the start of the new fiscal year, October 1.
The AMT, enacted in 1969, originally targeted 155 wealthy families who, it was found, paid no income taxes because of the multiple tax breaks they received under the tax code at that time. Since the AMT was not indexed to income, millions of Americans have found themselves subject to the tax ever since as incomes have risen. The IRS estimates that by 2010, 34% of all individuals filing tax returns will be subject to the AMT.
Reform of the AMT has proven elusive because of the massive impact it is likely to have on the federal budget. The Center on Budget and Policy Priorities, a Washington think tank, estimates repeal of the AMT could cost the federal Treasury between $800 billion – $1.5 trillion in revenues over 10 years. Replacing revenues of that magnitude proved daunting to Republicans in the last congress, as it will to Democrats in this one.
