In July, we took a look at the latest 800-pound tax gorilla–the alternative minimum tax (AMT)–and how it is threatening to gain more weight by bingeing on middle-class taxpayers and consuming even more of their hard-earned money. Well Congress thinks it has the answer ' or a number of answers, depending on who you listen to. Hmmm ' let's take a look at some of these possible "solutions."

Congress has been floating a number of AMT relief proposals. They seem to fall into four categories:

Abolish it completely

Wouldn'tit be nice to get rid of it altogether? This is a laudable goal and would simplify the tax code. However, there is one small problem. This Congress has decided that it must "pay for" any lost revenue–approximately $800 billion over 10 years if the AMT is abolished or $1.3 trillion if the Bush tax cuts are made permanent (not to  mention additional revenue loss further down the road). Some say we shouldn't worry about paying for it, but Congress says otherwise. Some of these folks hope that it will force the launch of serious, fundamental tax reform.

Continue to patch it

This is a minimalist approach that prevents further AMT encroachment on the middle class–but only for the years patched. While some argue that it is a shortsighted political solution, othersargue that it is a pragmatic stopgap measure and the best option in difficult political times, including the present. Some, such as Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA), have indicated that patching the AMT for the remainder of the Bush presidency is the best option for now. They hope that the next Congress and a new president will be able to put their heads together and agree on something more lasting and meaningful. Further, they probably expect that the expiration of the Bush tax cuts at the end of 2010 will be the gun to the head that will force Congress' hand to avoid the largest U.S. tax increase in history. In the meantime, a patch is estimated to cost nearly $50 billion for 2007 alone, and the patches get more expensive each year due to inflation.

Index it for inflation

This would, at least, hold the line where it currently is. Inflation indexing would have the same effect as a permanent patch but would not meaningfully simplify the tax code. This option is expensive too, although not quite as expensive as getting rid of the AMT.

Adjust or retool it

While this option may pose a "permanent" solution, it also invites a lot of political mischief. One such proposal being discussed by House Democrats would exempt individuals with annual incomes up to $125,000 and joint filers up to $250,000. It would also lower the AMT for individuals with incomes of more than $125,000 but no more than $250,000 and for joint filers with more than $250,000 but no more than$500,000. The plan would be paid for by a 4.3% surtax on income above these upper thresholds. While this proposal is avowedly designed to spare the "middle class" the pain of the AMT, some question whether it extends far beyond the middle class. In other words, there is an ongoing debate over the definition of "middle class." Another alternative that some politicians are looking at would replace the AMT with a 4% surcharge on income more than $100,000 for single filers and more than $200,000 for joint filers. Supporters of this plan maintain that only 2% of the entire population would have to pay the AMT. This, as well as the retooling plan described earlier, would amount to an income redistribution from the upper classes to the lower classes–an approach that could benefit Democrats at the polls if enacted.

Congress is exploring how to pay for AMT reform–if it does decide to follow the PAYGO (pay-as-you-go) rules. In addition to, or instead of, tax surcharges or fundamental tax reform, Congress has been busily exploring possible revenue offsets, e.g., tax increases.

The list of possible revenue offsets is more extensive than can be discussed in this article. One proposal getting a lot of attention is a tax on private equity funds, hedge funds, venture capital funds, and real estate investment entities. One bill would tax managers' income from profits interests in the vehicles at regular income tax rates, rather than the more favorable capital gains rates currently applied. Another piece of legislation would tax the income of these entities, if in partnership form, at corporate rates once they go public. Both of these proposals could have unintended consequences–such as discouraging business deals, chasing capital investment away from the United States, and adversely impacting investors' profits–and also fail to generate enough revenue to offset lost revenues from AMT relief or abolishment.

Revenue offset proposals that would raise big bucks or have an easier time getting through Congress have also received support. Big buck provisions include restricting or repealing taxpayer-popular items like the home mortgage interest deduction and the exclusion for employer-provided health insurance. Some also fear that the preferential long-term capital gains rates could be rolled back or repealed. These popular tax rules wouldn't go down without a huge fight. Proposals that may be passed with comparatively less resistance involve tightening "abusive" tax shelter rules and increasing associated penalties. Raising "sin taxes"–such as tobacco taxes–is already included in non-AMT-related legislation, such as the State Children's Health Insurance Program (SCHIP)–and could resurface in AMT legislation.

The bottom line is that there are benefits and drawbacks to each approach to AMT relief or reform. Any relief will likely be offset by tax increases. There is no clear-cut easy answer how to best fashion and pay for a solution to the AMT challenge.

Phil Beram, chief tax counsel,contributed extensively to this article.