Procrastinators, rejoice! You don't have to feel too guilty about getting a late start on your taxes this year. Thanks to Congress's tardiness in passing legislation, the IRS couldn't begin to process some returns until about a month later than usual. That delay has also postponed refunds for millions of taxpayers who usually file simple returns early in the season.
Why the holdup? Blame it on the alternative minimum tax. Congress created the AMT back in 1969 to ensure that 155 wealthy Americans paid their fair share of taxes. But the tax was never indexed to inflation, and lately it's been entrapping millions of unsuspecting taxpayers.
That's because this parallel tax system requires you to figure your taxes twice first, under the regular rules, claiming all your allowable credits and deductions, then under the AMT rules, which don't allow many of those adjustments. You owe whichever tax is higher. Although the AMT taxes more of your income, it does so at a rate of 26 percent or 28 percent. So wealthy taxpayers in the 33 percent and 35 percent tax brackets are often unaffected by the AMT.
Last year, the AMT snared 4 million people, whose tax bills increased by an average of about $2,000. Without congressional intervention, another 20 million taxpayers would have been hit by the AMT when they filed their 2007 tax returns this spring. After prolonged squabbling, Congress finally approved a one-year patch that boosted AMT-exemption amounts slightly above 2006 levels to prevent the expansion of this stealth tax.
That means that if you didn't pay the AMT in 2006, you're probably safe for 2007. But if you paid the AMT in 2006, and your financial situation is essentially unchanged, you can expect to pay it again in 2007.
Many people affected by this season's delay were not victims of the AMT; they were waiting to file tax forms that couldn't be processed until the IRS reprogrammed its computers to reflect the AMT change. That includes taxpayers claiming the Hope or Lifetime Learning credit for college tuition (which is available only to individuals whose income is less than $57,000 and to married couples with incomes less than $114,000).The delay also affected taxpayers with incomes less than $100,000 who claim child-care or elder-care credits on Form 1040A and taxpayers, regardless of income, who claim a tax credit for installing energy-efficient windows and doors.
Mary Beth Franklin is a senior editor at Kiplinger's Personal Finance magazine. Send your questions and comments to [email protected]