The Alternative Minimum Tax Change That Could Cost You $3,700 in 2013

    Text size

If no agreement is reached to avoid falling off the fiscal cliff at the end of this year, tens of millions of taxpayers would face a big, unexpected tax increase that would be payable immediately-by April 15, 2013-as they become subject to the alternative minimum tax (AMT).

If that were to happen, it would create massive confusion during the January to April tax filing season. The IRS is not ready for the AMT to expire. About half of all taxpayers would be told not to file their taxes until late March at the earliest and refunds will be delayed by at least several weeks.

Given the tenuous nature of the economic recovery, the confusion over tax filing, a large, unexpected tax liability and delayed tax refunds might be enough to tip the economy back into recession.

Failure to fix the AMT-at least for 2012-is not an option.

What is the Alternative Minimum Tax (AMT)?

The AMT, originally passed in 1969 to ensure that high income earners would have to pay some federal income tax, has never been indexed to inflation.

Instead, each year, Congress passes a "patch" that indexes the AMT to inflation and exempts most taxpayers from the AMT.

According to the Tax Foundation, "Congress has been resistant to making permanent the current practice of inflation-adjusting the AMT exemption level because congressional budget rules would score it as a large tax reduction, running afoul of budget-neutrality requirements."

The AMT patch is usually a routine, bipartisan fix that passes easily.

The Alternative Minimum Tax Change

This year, because of the presidential election and the looming fiscal cliff, no action has been taken on the patch, which means that taxpayers will become subject to the AMT under the original 1967 rules.

If nothing is done to address the AMT, 28 million new taxpayers will become subject to the AMT and will be hit with an unexpected tax bill for 2012 that will have to be paid by April 15, 2013.

The remaining content is exclusively for Money Morning subscribers. To gain access, enter your email address:

(After submitting your email address the page will refresh with the full article. You will receive a welcome email from Money Morning including the benefits of your free subscription.)