Alternative minimum tax

Friday, the Internal Revenue Service reported a new record, the most federal income tax returns ever to pay no income tax. In 2005, the most recent data available, 7,389 returns with Adjusted Gross Income of $200,000 or more paid no federal income tax. That was up from 2,833 returns the year before.

Why the big jump in non-taxable returns? The income tax law was changed in 2004 to allow the Alternative Minimum Tax Foreign Tax Credit to offset 100% of pre-credit AMT. Previously, it could only offset 90%. Another factor was the lifting of the 50% of AGI limit and the limit on itemized deductions for charitable contributions made between August 27, 2005 and January 1, 2006 for the relief of Hurricane Katrina victims.

My column on nationaljournal.com this week explains why the debate is proving to be so difficult in spite of the fact that Congress is talking about providing a tax cut.