Late action complicates tax planning: AMT legislative fix may mean delays

Expect the early tax-filing season to be a little muddy in 2008-and a tax package already received by mail from the Internal Revenue Service doesn’t mean you’re off the hook.

While many Indiana taxpayers are now protected from additional federal taxes for another year thanks to late action by federal lawmakers in mid-December, millions will have to wait until February to get tax refunds in the mail because of that congressional delay.

On Dec. 19, Congress gave final approval to a plan postponing for a year an expansion of the alternative minimum tax, or AMT, which was passed in 1969 and aimed at very wealthy families who used deductions to avoid paying any federal income tax. However, the AMT has not been permanently adjusted for inflation, and that’s led to more middle-income taxpayers being affected through the years. Congress has put temporary patches in place for years, but has not taken any permanent measures.

More than 4 million people were subject to the tax for their 2006 income, but without the latest congressional fix, about 25 million families would have faced an extra tax hit for their 2007 income.

The most recent congressional measure slightly increases the amount of income exempt from the AMT-from $42,500 in 2006 to $44,350 in 2007. For married couples, the exemption increases from $62,550 to $66,250.

But because of the late congressional action, the IRS reports that AMT-related tax filing and any refunds will be delayed. New forms have been released, but the federal agency had to reprogram its computers to reflect the taxcode change, delaying the overall processing. And tax packages already sent out and arriving in the mail after New Year’s Day were printed in November and don’t reflect the changes.

Any taxpayer using those forms will have to wait until February to file their taxes, according to the IRS. The forms will begin being processed on Feb. 11. First refunds for those people will start going out within two weeks of that date. As always, the IRS points out that e-filing can result in quicker refunds and form processing.

The IRS has a special section on its Web site at www.irs.govwith updated copies of AMT forms. Specifically, those forms affected by the delay include education credits, residential energy credits, child and dependent care expenses, mortgage interest credits, and first-time homebuyer credits in Washington, D.C.

To help ensure smooth tax filing, the federal agency is working with tax attorneys and professionals to make sure tax information is up to date. Those who might be affected by the AMT in the future can start acting now, local attorneys and tax preparers say.

“Taxpayers who are on the line between AMT and reg- ular tax can sometimes take steps to avoid losing benefits of certain deductions and exemptions not available under that alternative tax,” said Larry Stroble, a partner at Barnes & Thornburg who heads the law firm’s tax department.

One example is changing the timing of the fourth quarter’s estimated income tax payment, he said. Taxpayers can move it to before or after Jan. 1 if it can be used as a deduction in a year in which the taxpayer won’t be subject to the AMT.

Stroble said a second example involves changing the mix of municipal bond holdings to reduce so-called private activity bonds, which are subject to AMT.

Taking these steps means that a taxpayer must know in advance when they may be subject to the AMT for the coming year, Stroble said.

If someone was subject to the tax in 2007, or close to it in that their regular tax would have been almost equal to the AMT, then Stroble suggests projecting the 2008 income and deductions to compare the regular tax and AMT to determine the danger of being subject to it this year.

“Of course, if Congress waits to adjust the next year’s exemption until late in the year, as it did for 2007, it makes tax planning very difficult,” Stroble said. “Until Congress either repeals the AMT or settles on a stable structure for it, millions of taxpayers are going to face a challenge in trying to determine their expected liabilities from year to year.”