AMT tax mess may not be fixed soon.

from www.mercurynews.com


By Mark SchwanhausserMercury News
Article Launched: 10/27/2007 01:39:24 AM PDT
Few regions have more people who would benefit from a new Democratic proposal to eliminate the alternative minimum tax than Silicon Valley, one of the dreaded tax system's prime hunting grounds. But don't hold your breath.
The revamping of the tax code unveiled Thursday has virtually no chance of passing in its current form this year, before the 2008 elections - and may never be approved.
It's not even clear whether Congress could approve a temporary fix to save millions of Americans from getting caught by the AMT when they file their 2007 returns. There's pressure to move quickly because the Internal Revenue Service starts sending its tax forms to be printed Nov. 7.
But the proposal from Rep. Charles Rangel, the Democratic chairman of the powerful House Ways and Means Committee, does accomplish one important thing. It has framed the election year debate over tax policy:
• Should Congress eliminate the AMT, which was designed to snare 155 wealthy taxpayers in 1969 but could whack an estimated 21 million Americans in 2007?
• If so, should lawmakers raise other taxes to offset the $800 billion in revenue that would be lost by eliminating the AMT? If Congress sticks to its pay-as-you-go policy vs. adding to the budget deficit, should rich Americans, corporations like Hewlett-Packard or venture capitalists along Sand Hill Road pay more?
• And can the nation afford to eliminate the AMT and keep President
Bush's tax cuts in effect, rather than letting them phase out as originally planned?
"Rangel is making a statement," said Clint Stretch, director of tax policy for accounting powerhouse Deloitte & Touche in Washington. "Implicitly, everyone wants to talk about eliminating the AMT, and everyone is talking about extending the Bush tax cuts. And he is putting squarely on the table the question, 'How would we do that?' "
Many taxpayers don't realize they're supposed to calculate their income tax under both the regular rules and the AMT rules - and pay whichever bill is larger. The tax's reach is spreading to the middle class because every cut under the regular tax system forces more taxpayers into the AMT, which never has been indexed to inflation.
Democrats have led the push to repeal the AMT because its bite is deepest in "blue states" such as California, New Jersey, New York and Virginia. But Republicans have resisted, with House GOP leader John Boehner of Ohio calling Rangel's bill "the mother of all tax hikes."
Even if the bill goes nowhere, Democrats will paint Republicans as the bad guys, said Thomas Ochsenschlager, vice president of the American Institute of Certified Public Accountants. "Rangel and the Democrats can say, 'Hey, we were going to eliminate the AMT - the big bogyman - and the Republicans wouldn't let us do it.' "
Many residents in affluent Silicon Valley have a lot at stake in this debate. If Congress fails to pass the one-year fix, the AMT will strike 71 percent of taxpayers with incomes between $75,000 and $200,000 - and more than one-third of the taxpayers with incomes between $75,000 and $100,000, Ochsenschlager said.
Rangel, of New York, plans to break out the patch from the giant bill into a separate bill that he will announce next week. To pay part of the bill for the patch, which is estimated to cost the government $50 billion in revenue over 10 years, Rangel has targeted venture capitalists and hedge fund investors. He aims to tax them at ordinary income-tax rates rather than the sharply lower capital-gains rates they currently pay.
Monday, the National Venture Capital Association is primed to deliver letters to lawmakers from 500 entrepreneurs who oppose such a tax change.
Finding a way to kill the AMT is politically sensitive. In 2005, President Bush's tax reform panel ignited a firestorm by suggesting the lost revenue could be offset by slashing coveted deductions such as mortgage interest, state and local tax payments and health insurance premiums.
Rangel's plan would pay for the lost AMT revenue primarily by taxing the wealthiest Americans more. He proposes a 4 percent surcharge on taxpayers earning at least $200,000, and a 4.6 percent surcharge on incomes above $500,000. High-income taxpayers also would face limits on itemized deductions and personal exemptions.
Rangel's bill also would extend a raft of tax breaks that are scheduled to expire, including the research-and-development credit and deductions for private mortgage insurance and state and local sales taxes.
In addition, the bill would cut corporate tax rates, with the top rate dropping from 35 percent to 30.5 percent. To offset those cuts, though, Rangel would tighten rules that favor relatively small numbers of corporations.
For example, the plan would force U.S. companies to defer deductions from overseas divisions if they keep those profits overseas. In 2005, U.S. companies were given a one-year break that slashed taxes on so-called repatriated profits, and billions of dollars flowed back home.
Silicon Valley's 20 largest public companies brought back $28.7 billion in foreign profits, with Hewlett-Packard accounting for $14.5 billion.