Senate OKs One-Year AMT Relief Deal on Alternative Minimum Tax now goes to the House for approval.

Dec. 6, 2007  -- After months of back and forth, the Senate approved a one-year patch to shelter millions of middle-class Americans from the Alternative Minimum Tax.

The temporary one-year fix will give between 19 and 23 million Americans billions in tax relief from the AMT.

The notion that something should be done about the AMT is nearly unanimous as it passed the Senate by an 88 to 5 margin Thursday night -- but Democrats and Republicans disagreed on how best to enact reform.

As a result, the Senate opted for the one-year fix and the issue will have to be revisited before the 2009 tax season.

The AMT is an antiquated chapter in the complicated U.S. tax code. When it was originally passed it was meant to close a tax loophole for the wealthy, but because it was not pegged to inflation, the tax has ensnared millions more Americans each year, erasing their deductions.

Senate Republicans were able earlier in the day to defeat an AMT proposal pushed by Democrats in the House of Representatives that would have sheltered middle-class Americans from the AMT, but offset the revenue lost to government coffers by changing the tax laws for wealthy subsets of taxpayers.

The Democrats were aiming at groups like hedge fund managers who defer paying taxes on their offshore income as well as private equity, venture capital and real estate firms that are compensated based on the appreciation of the value of their company and so are liable only for a 15 percent capital gains tax rate instead of the 35 percent income tax rate.

Raising taxes on these people, many Republicans argued, would cool economic expansion and drive business overseas.

Sen. Judd Gregg, R-NH, said the Democratic plan "would chill economic expansion in this country, would undermine our ability to create capital in this country, and as a result would undermine the ability of entrepreneurs to go out and create jobs."

Senate Minority Leader Mitch McConnell, R-KY, said it does not make sense to protect one group of Americans from taxes while hiking taxes on others.

The AMT proposal is not finished. House Democrats must first vote on it and it is unclear if either the House Speaker Nancy Pelosi, D-CA., or the powerful chairman of the House Ways and Means Committee, Charlie Rangel, D-NY, will sign off on a bill that is not "paid for."

Democrats have argued that passing tax relief without offsetting it with revenue gains someplace else was fiscally irresponsible.

In the Senate, Majority Leader Harry Reid, D-NV., said he was frustrated to have to vote for the AMT patch without any offsetting taxe hikes.

"I am relieved that the Senate has acted this evening to extend AMT relief for 19 million taxpayers – including nearly 100,000 Nevadans. But I want to make it perfectly clear that I am very disappointed Republicans prevented the Senate from passing AMT relief in a fiscally responsible manner. Instead, Republicans insisted that the $50 billion cost of this proposal be added to the national debt – a debt that is already growing at a rate of $1 million a minute," Reid said.

Meanwhile, the IRS is waiting to print its 2007 tax forms.