by Robert Steere, Toolkit Staff Writer

Just like the trousers of a rambunctious seven year old boy, the alternative minimum tax law seems to have more patches than it does original cloth. Congress, in October's Emergency Economic Stabilization Act and in February's American Recovery and Reinvestment Tax Act, has added two more patches - one for 2008 and one for 2009. While it's really time to throw out the old and buy a new pair of pants, it seems that in the foreseeable future we'll continue to get only patches instead.

The alternative minimum tax (AMT) patch has become an annual ritual in Washington during the past several years. Say "AMT patch" around the insiders of Congress, and they know exactly what you are talking about. But let's look and see what it means.

In simple terms, the AMT patch serves to exempt large numbers of taxpayers from the alternative minimum tax. Without the annual patches, millions more taxpayers would be subject to AMT, and would be paying billions more in taxes.

For a taxpayer, it is a really good thing to be exempt from AMT, because AMT only increases your income tax bill. And having to do the calculation for AMT is a major hassle for even the most sophisticated tax preparer. The law requires a taxpayer to calculate a "tentative minimum tax" under AMT, and if it is higher than your tax liability calculated the normal way, (surprise, surprise) you have to pay the higher amount.

Technically speaking, the AMT law taxes the excess of taxable income calculated under AMT over an exempt amount of income. An AMT patch increases the exempt amount of income that a taxpayer deducts before calculating the alternative minimum tax. Thus, while it eliminates AMT for millions of taxpayers, it also reduces AMT for those who remain subject to it.

The AMT patch for 2008 sets the exemption amount at $46,200 for single taxpayers and $69,950 for married taxpayers filing jointly. The AMT patch for 2009 sets the exemption amount at $46,700 for single taxpayers and $70,950 for married taxpayers filing jointly. Without the patches, the underlying law sets the exemption amount substantially lower--$33,750 for a single taxpayer and $45,000 for married couples filing jointly.

Congress claims that the AMT patch for 2009 will cost nearly $70 billion in taxpayer savings. With $70 billion at stake each year, it seems about time to give up on patches, throw this pair of pants out, and replace the AMT law with a new pair of trousers.

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Posted March 12, 2009.