The Alternative Minimum Tax (AMT) has its own quiet corner in the world of US tax law, at least for now. Simply put, every year anyone fling a return determines their regular tax rate and their AMT rate. The higher of the two is what they owe. For roughly 95% of Americans that’s the regular tax and they never worry about the AMT, but for some – typically, upper-middle income families with children, the AMT can be significantly higher.
This story begins in 1969, when 155 of the country’s wealthiest households came under the national spotlight for paying little to no income tax. Collectively, they provided for just 0.1% of total government revenue – far less than what the ultra rich contribute today (yes, even considering the plethora of cuts, deductions, loopholes etc. that have been implemented in the past few decades). This untapped revenue source prompted legislators to create the first “millionaire’s tax,” formally known as the Alternative Minimum Tax. The policy was created as a way to ensure that the nation’s wealthiest citizens would have to pay a minimum amount of taxes. Soon after becoming law, the government was collecting nearly 7 times as much revenue from the ultra rich than they had been; the AMT was largely regarded as both a political and fiscal success. The feat had one small problem though: The AMT legislation failed to index for inflation, leading the number of eligible households to slowly creep-up year after year. Although there have been several reforms, known as “patches,” to increase the exemption levels, the most recent patch expired at the beginning of 2012.
IRS building on Constitution Avenue in Washington, D.C.. (Photo credit: Wikipedia)
That means that for the moment, as far as the IRS is concerned, the AMT for 2012 has the same parameters as it did 20 years ago, in 1993, the last time congress made a permanent change to the income thresholds . If that doesn’t sound too bad, consider there has been 60% inflation since then. So, if nothing happens before the year ends then 25 – 30 million taxpayers will be in for a rather unhappy New Year greeted with higher bills and smaller reduction opportunities. In many circumstances, the tax hike would be even larger then paying new rates via the expiration of the Bush tax cuts. Upper-middle income families with children living in high tax states would be the most vulnerable, because two tax breaks — itemized deductions from state and local taxes and personal exemptions, are disallowed under the AMT. The scenario gets worse: IRS commissioner Steven Miller says,”If lawmakers fail to protect the middle class from having to pay the Alternative Minimum Tax by Dec. 31, next year’s tax filing season will be a mess for tens of millions of taxpayer,” . On top of an onslaught of expected filing errors, they may need to halt 60 million taxpayers from filing their returns until late March. Yikes.
So while congress haggles and the media obsesses over the fiscal cliff and expiration of the Bush era tax-cuts, let’s home some lawmakers remember the AMT could make that New Years Day hangover last a LOT longer.
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