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."
Let it go into affect. REV II comes earlier than expected.
Yeh, but we all know the good consequences will be attributed to the genius of The One and the negative consequences will be blamed on the GOP, Bush, a hurricane, bad hair day, etc. The media is so afraid of this administration,,they don’t dare bark out of turn.
I never plan for a refund and have always raised my withholdings by 1 if I get one. I was looking for that sweet spot where I don’t get a refund and only have to pay a small amount.
I moved my 401(k) to a Roth and got married this year. On top of that, with all the crap going on in DC, the wife and I are preparing for a perfect storm of taxmageddon. I’m preparing for a tax bill well in excess of $10,000.
WE always claim 9 .... and save enough to be able to pay what we might owe....NO WAY is the government going to use OUR money during the year...
EVERYONE should up their deductions to 9....
Mine’s at 5 and I’ve seen my returns dwindle. This will be the first year in a while that I’m not a student, but my income also went up.
I wish they’d just do away with the current tax code, but I know that’s akin to wishing for a Skittle-shitting unicorn.
If the SPENDING is not dealt with NOW, nothing else matters anyway. It will only get worse and continue on until the NEXT FISCAL CLIFF when once again we (as in the taxpayer) is at a CRISIS again.
In all my years of living, there has ALWAYS BEEN A CRISIS that WE need to FIX with OUR money. I can't remember a year without one. They simply can't get enough.
Destroy their CREDIT CARD TODAY. If they don't, we need a MAJOR PROTEST IN D.C.
I do our taxes, and I don’t want Uncle Sam holding my money for a year, so we never get a refund. In fact, we pay withholding, but also I pay in a quarterly Estimated Income form, so I dole out (what I know we’ll owe at the end of the year) slowly to the gov’t., 4 times a year.
What does it get me in the end, nothing more than the satisfaction that they didn’t get our money ahead of schedule. Used to be some advantage to it when interest rates on savings were higher, but no advantage to it now that interest rates are so low...just satisfaction in knowing it’s in our possession until I absolutely have to pay :)
P.S. I pay it in quarterly to avoid penalties for not having paid in enough during the year.
Rush has been discussing chatter about taking away the 401k deductions. That will ensure that I stop making those contributions and move the money accrued to a better place. The bastards always have their hands in your pockets.
unintended consequences?
This was all agreed back in the day for the debt ceiling increase, right??
They may go after 401K’s AND IRA’s!!
I don’t calculate if I owe AMT, never have, never will. If the IRS want’s to do the work and determine I owe it and send me a bill, more power to them. But so far they haven’t...
This was all foreseen and intended. There is no Unintended Consequences. Nothing that happens in politics is unintended or unforeseen. They wanted it this way.
They deliberately and intentionally, with full knowledge and awareness, refused to index this tax for inflation.
Note that the same bastards indexed their pay and pension for inflation.
It’s not incompetence. It’s deliberate.
“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.”
You can’t blame Pres. Bush for this one. This is the doing of the Democrat congress in 1996 playing the class warfare game, and now, with the shameful devaluing of the dollar by inflation over the decades, people making as little as
$33,750 are considered “rich” enough to pay this surcharge on “millionaires.”
Sound familiar? Obama’s class warfare/redistribution scam will gut the middle class just as Democrats have always done.
Every year they put a temporary patch on it because they don’t really want to fix it.
1969........not 1996......
Except there is a fine for both underpaying and overpaying on your W-4.
“We’ve always been at war with Eastasia, Winston”........
I expect them to. I moved to IRA to avoid the tax hit at retirement time, but since I’m 32, I was doing it anticipating that it won’t make a lick of difference anyway. I’ve got a job that pays me more than I expected to make, so the hit that comes in my taxes will likely be offset when I stop paying into my IRA after they confiscate it.
I just hope the market completely tanks and I lose everything in it before they think about taxing it. Let them pound sand.
I’m thinking that I picked a bad time to tile the kitchen.
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