Posted on 11/29/2012 11:31:01 AM PST by Red Badger
One of the key questions lurking in the "fiscal cliff" talks — though well below the public's radar — is what happens to the alternative minimum tax — or AMT.
Implemented in 1969 to make sure upper-income Americans pay their share of taxes, the AMT has increasingly snared more middle-income Americans over the years because it was never indexed for inflation.
During the 2011 tax year for example, the higher tax hit single taxpayers with incomes as low as $48,450 and joint filers making only $74,450.
But millions more Americans could be subject to the AMT in their 2012 returns if Congress fails to reach a deal on the fiscal cliff before year-end. That's because the AMT is currently scheduled to hit individuals making as little as $33,750 a year and joint filers making $45,000. (Read More: Complete Coverage of 'Fiscal Cliff')
"I call it AMT shock," Dick Hoey, chief economist at BNY Mellon, told CNBC recently.
"Normally some four million people pay the AMT," Hoey explained. "But if we don't fix this on the 2012 income, what's due in 2013 will be additional taxes by an extra 28 million households. If you're in the $75,000 to $300,000 income bracket, you can likely forget about a refund if they don't fix it."
The bite on American households would be huge and could have a big impact on US consumer spending—and the economic recovery. (Read More: Stocks Are Being 'Cliff'-Lashed)
"This would hit immediately and likely cost taxpayers an average of some $3,700 in taxes," said Leon C. LaBrecque, managing partner and founder of LJPR, LLC, a wealth management firm. "It would be a rude awakening to say the least."
Yet even if Congress resolves the fiscal cliff, more Americans could still end up seeing a huge tax increase under the AMT. That's because the tax itself is part of the negotiations over ways to boost government revenue. And Congress would need to act separately — putting in a so-called patch — to insure more people aren't subject to it because of inflation.
"It's hard to plan for the AMT with all the uncertainty," said Howard Kaplan, a CPA/PFS in Englewood, N.J. "People are dealing with possible capital-gain tax increases, they don't know what deductions may be gone and wondering if they should sell or keep stocks at the end of the year. The AMT is complex beast on its own and it's even more complex now without a patch and the 2000 year targets."
(Read More: Latest on the Fiscal Cliff Talks in Washington)
The AMT is essentially a parallel tax in that excludes certain deductions — like state and local income taxes — for people making a certain income level each year. That means taxpayers in AMT brackets have to figure out which tax is more, the AMT or regular taxes — and then pay the higher amount.
AMT rates currently range from 26 percent for singles to 28 percent for married.
To keep middle-income people from being unfairly hit by the AMT, Congress has enacted temporary relief during each of the past several years — so-called patches — that raises the income levels. But so far there is no patch for 2012.
The alarm bells over the patch — or lack of one — have reached the point where the acting commissioner of the IRS sent a letter to Congress this month saying the tax collection agency would need to tell some 60 million taxpayers that they may not file their 2012 tax returns or receive a refund until the IRS makes changes to its system (a patch) and that "they might not be able to file returns until late March of 2013."
The Bush-era tax cuts — set to expire at the end of the year as a part of the fiscal cliff — where a boon to some but actually pushed more people into the AMT, after they figured out which tax bill was higher.
More than half of AMT revenue in 2010 came from households with incomes over $200,000, according to the Center on Budget and Policy Priorities. But as AMT rates are not indexed to inflation, more upper middle incomes are hit by the tax than the targeted high end incomes.
"If you're income is high enough you get moved out of the AMT. It really effects the $300,000 to $500,000 income levels, and states like California and New Jersey where people can't deduct children or state income taxes," LaBrecque added.
As for what Congress and President Obama will do in the weeks ahead about the cliff and the AMT, that's a guessing game said LaBrecque.
"They could keep some of the Bush tax cuts and do a patch, not keep them and do a patch. Some people might not get hit by the AMT, some may. It's hard to make sense at this point," LaBrecque said.
Anyone looking for a permanent end to the AMT as part of a long term tax reform package, will be disappointed say analysts. The tax simply brings in too much revenue with no replacement in sight.
The original AMT collected just $122 million — about $700 million in today's dollars — which was just over one-tenth of one percent of all individual income tax revenue. Fast forward to the last tax year of record, 2010, and some $102 billion was collected.
Congressional Republicans have called for ending the AMT, while President Obama said on the campaign trail this past year, that he'd let it go and replace it with the so-called Buffett Tax, a higher tax rate on the very upper income levels.
Meanwhile, the Senate Finance Committee released a proposal on taxes this past August, calling for an increase in the AMT exemption amounts for 2012 to $50,600 (individuals) and $78,750 (married). The proposal would also increase the exemption amounts for 2013 to $51,150 (individuals) and $79,850 (married). But so far, it remains just a proposal.
For now, all taxpayers can do is look to some sort of patch and hope for the best, said Melody Juge, director of Life Income Management, a retirement management firm.
"These guys (Congress and the president) aren't that dumb that they wouldn't do a patch on this," Juge said. "I think they'll do the right thing on the AMT. But honestly, I think the best thing would be a flat tax, end deductions and get rid of the AMT once and for all."
Well aware of the “fine”....but, you can plan so that you avoid it...you just have to have a good financial person thinking about it (which my husband is)
Should have added....planning by paying QUARTERLY Estimated taxes...
Good!!!! I got hit with the AMT once, it was very, very painful. I want the pain to be felt FAR and WIDE.
If only people making $33K a year WOULD pay some taxes.
Right now I think they are on the bubble for getting EITC.
It takes me about four hours to complete the stupid form. Not an easy task, especially after a few glasses of wine. I have screwed it up three times in the last few years and usually to my advantage, so they send me a larger refund.
Wish everyone had to pay their taxes quarterly. You would see a LOT of people crawling all over their congressmen to get the code changed and rates lowered.
in other words: Keep em occupied.......over there.
Don’t be such a passive quitter!
Cant you get your IRA into something you can self-manage?
having some of your IRA in physical gold or silver will ensure you do not lose every paper dollar of it
after you stop funding your IRA think hard about some tangible investment you can buy and hold for the long term!
Even a doublewide parked on some arable land with underground water, owned free and clear
They will.
To many people on SS and other forms of governmental assistance. The pile of money is to large.
My plan:
move tax day to Oct 31st and eliminate withholding.
Make everyone write one big check right before election day.
Let it go into affect. REV II comes earlier than expected.>>>>>>>>>>>>>>>>
Agreed. Its time to make POSHITUS pay.
I have long advocated exactly that.
http://www.freerepublic.com/focus/news/2963306/posts
As usual FR is ahead of the curve....
I posted weeks ago what are your CPA's and Enrolled Agents doing? Are they Freaking? Mine are, they have been warning of all this for weeks.
Tomorrow I go see the a CPA friend who has taken a tax planning program and taken out the "Patch" to see if we are in AMT land this year if this all falls apart, I'll keep you posted....
This is all serious as a Heart Attack folks, I need to start another thread about CPA's etc and what they are experiencing and what they are recommending their clients to at least consider....
You don't have to be wealthy to be annoyed with this. Just be middle class and use TurboTax (or its equivalent) and you'll know what I mean.
It seems totally ‘unfair’, in that if you calculate your taxes, using the government’s own laws and pay too little, then they say you have to pay more simply because you are obeying the laws.....They should just come out and say, “If you make this much, then you pay this much.” and be done with it, don’t beat around the ‘Bush”..............
Unfortunately I’m a bit of a pessimist. I’m 32 and don’t believe I’ll live to see retirement. When the gun grabbers start going door-to-door, I’m of the ilk who will fire back and likely die in the fusillade. If that doesn’t happen, I don’t believe this nation will resemble anything we currently know as I get older. If I make it to retirement age and the world hasn’t completely shit the bed, I’ll either have nothing left in my accounts or will be so beat down that I don’t care.
I was preparing for pastoral formation at one point in my life and was contented with the idea of living a life of poverty, sacrifice, and worship. Now that I’m a successful engineer making a modest living, I have no debt and do not covet material possessions. If I lost everything tomorrow, I would not weep for my loss but be thankful for my life. Material possessions can be replaced.
As life becomes more difficult in this country, I’ll be spiritually prepared to fight for my liberty, and at this point, retirement is far off and something I pray to achieve but under which don’t plan to live a life of excess.
But yes, Washington creates tax laws then gets upset when people follow them and the rich don't pay enough. So they create a second tax system which doesn't solve the problem. And they're still upset when rich people still don't pay enough taxes. So they create a third tax system...
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