Quick fix ignores long-term AMT problem.

On Oct. 4, President Bush signed "The Working Families Tax Relief Act of 2004," marking the fourth tax cut in four years since he took office in 2001. More commonly known as "the extenders" bill, this one was approved by Democrats and Republicans, even though it adds $146 billion to the federal deficit and in spite of Senate rules requiring offsetting expenses with revenues. The bill extends several provisions that expired at the end of 2003 or were scheduled to expire at the end of 2004. Its costs are pushed into the future.

Without the legislation, three tax provisions affecting an estimated 94 million Americans would expire at the end of this year. The new law keeps the per-child tax credit at $1,000 through 2010, retains an expanded 10 percent income-tax bracket through 2010 and retains provisions to provide tax relief for married couples through 2010. The expanded AMT exemption amounts that were due to expire in 2004 are extended for one year, through 2005.

By lowering tax rates, more people are getting trapped in the AMT. There is no way to reduce your AMT, unless, of course, you want to move to a state with lower property taxes. Instead of really fixing the way the AMT is calculated by indexing it to inflation, Congress just extended AMT exemptions for one-year, choosing to ignore the long-term problem.

Congress enacted a special "minimum tax" in 1969, after learning that 155 people with incomes of $200,000 or more paid not one penny in income tax. A generation and many mutations later, the minimum tax no longer affects just the wealthy. In today's dollars, 1969's $200,000 income is equivalent to about $1 million. But many people paying AMT are middle-income wage earners, not affluent people who shelter money in tax dodges that were largely curtailed in the 1980s.

By 2008, 29 million taxpayers will find themselves subject to the AMT, according to a congressional committee charged with predicting such things. And, unless the AMT is repealed or reconfigured, an estimated 35 million people will pay AMT by 2010.

Uniform Definition of Qualifying Child

The new law creates a uniform definition of qualifying child for the tax benefits that relate to children. Under the new law, a qualifying child must meet only three tests: relationship, residence, and age.

* Relationship -- The child must be the taxpayer's son, daughter, stepchild, sibling, stepsibling or a descendant of such individuals. Foster children placed with the taxpayer by authorized placement agencies satisfy the relationship test. If the child is the taxpayer's sibling, stepsibling or a descendant of any such individual, the taxpayer must care for the child as if the child were his or her own.

* Residence -- The child must live with the taxpayer in the same principal place of abode in the United States for more than half the year. Military personnel on extended active duty outside the United States are considered to reside in the United States. Under current law, the taxpayer and child are considered to live together even if one or both are temporarily absent due to special circumstances, such as illness, education, business, vacation or military service.

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* Age -- The child must be under the age of 19, a full-time student if over age 18 and under age 24, or totally and permanently disabled. However, under current law, qualifying children (who are not disabled) must be under age 13 for the purposes of the child and dependent care tax credit, and under 17 (whether or not disabled) to qualify for the child tax credit. A tiebreaker rule, similar to the current EITC tiebreaker, applies if more than one qualifying taxpayer claims a benefit for the same child. This new rule affects the following tax benefits: the dependency exemption, child tax credit, earned income credit, dependent care credit and head of household filing status.

Corporate Tax

On October 22, President Bush signed the most comprehensive revision of corporate tax law in nearly two decades, showering $136 billion in new tax breaks on businesses and other groups. It is interesting to note Treasury Secretary John W. Snow's comments during final House-Senate conference committee discussions that the legislation included, "a myriad of special interest tax provisions that benefit few taxpayers." Those provisions give tax breaks to restaurant owners, filmmakers, brewers, distillers, bow-and-arrow manufacturers, tackle-box companies, native Alaskan whalers, NASCAR track owners, and importers of Chinese ceiling fans.

The bill started as a modest effort to repeal a $5 billion annual tax break provided to American exporters that was ruled illegal by the Geneva-based World Trade Organization. Among the largest beneficiaries are firms such as pharmaceutical, biotechnology, and medical device makers that do large amounts of business around the globe.

Phyllis Bernstein, CPA, is president of Phyllis Bernstein Consulting, Inc, in New York City. Contact her at Phyllis@pbconsults.com or through www.pbconsults.com.