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Education credits could be denied by tax code quirk

By Associated Press Published: July 26, 1997 12:00 AM

Democratic staff of the tax-writing House Ways and Means Committee estimated

at least 2 million taxpayers would lose some or all of the Republican bill's

$500 child credit by 2002. The problem stems from how the credit interacts

with the tax code's alternative minimum tax requirement.

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The AMT is designed to ensure high-income taxpayers don't use deductions

or other tax breaks escape paying a fair share of taxes. More and more middle-income

people will be taken under the AMT in coming years because it never has

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been adjusted for inflation.

Rep. Barbara Kennelly, D-Conn., a Ways and Means member, has sounded an

alarm to force White House and Republican tax negotiators to resolve the

problem in tax talks now under way.

``I think this is just going to blow people's minds if they find out that

by taking these promised good things, they end up in a very, very complicated

tax situation,'' Kennelly said.

She added the tax problem ``could end up costing them money, because they

have to get an accountant'' to avoid running afoul of tax laws.

Kenneth Kies, staff director for the Joint Committee on Taxation, agreed

the AMT's effect on middle-income families is a general concern.

``That's a problem that's going to emerge over the next five to 10 years,''

Kies said Saturday during a break in the tax talks. ``No matter what they

do, whether they take the House bill or the Senate bill, that's a problem

the Congress is going to have to come back and take a look at.''

House Ways and Means Chairman Bill Archer, R-Texas, echoed the theme.

``As time goes on, the AMT will have an extremely negative impact on many

people,'' Archer said.

The GOP tax proposal includes a $500 per child tax credit for children under

age 17 as well as the so-called Hope scholarship providing a maximum $1,500

credit for tuition expenses.

Simply put, a family that earns about $60,000 and takes the credits could

find it has taken so many deductions that the alternative minimum tax comes

into play, which in turn would wipe away some or all of the new tax breaks.

Consider this example:

In 1999, a family making $64,950 with three children, including one in college,

would qualify for $2,500 in the new tax credits _ $1,000 for the child credits,

$1,500 for the scholarship. The AMT would cut the credits by $880, according

to an analysis of the GOP bill by the Ways and Means Democratic staff.

The estimate is based on Senate bill 2, which has a similar child credit

as the bill passed by House Republicans.

A major private accounting firm, KPMG Peat Marwick, came to a similar conclusion

last week. A family facing the prospect of even calculating the minimum

tax will face a new and onerous tax burden.

``They still have to go through the ugly computations,'' said Evan Liddiard,

KPMG's associate national director for legislation in Washington.

Under current law, individuals are required to pay the AMT when their deductions

and write-offs are such that their regular income tax falls below the AMT.

To determine whether to pay the AMT, taxpayers figure their regular tax

and go through a complex formula to calculate adjusted minimum tax levels,

then pay the higher of the two.

The child credit and tuition tax credit are two so-called ``preference items,''

or a type of deduction that can't be subtracted from the adjusted minimum

tax. A high number of such preference items, such as deductions for high

state and local taxes or for several children, can force middle income families

to pay the AMT.

The House version of the tax bill seeks to ease the AMT burden by raising

exemption levels by $1,000 every other year from 1999 through 2007, then

letting it rise with inflation after then. The changes would cost about

$12 billion over five years.

Because the AMT has not been adjusted for inflation, millions of families

will be covered by the complex tax regime as incomes rise. The Joint Tax

Committee estimates that 600,000 taxpayers will be subject to the AMT in

1997, a figure that will grow to 6.2 million by 2006.

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