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.
Acting IRS commissioner Steven Miller said in a letter to Sen. Orrin Hatch, R-UT, "If there is no AMT patch enacted by the end of the year, the IRS would be forced to operate the 2013 tax filing season based on the expiration of the AMT patch. There would be serious repercussions for taxpayers."
Miller continued, "The changes to the AMT exemption amount and the special tax credit ordering rules could affect more than 60 million taxpayers – nearly half of all individual income tax filers [would have to fill out the AMT forms even if they did not owe any taxes under the AMT]. About 28 million taxpayers would be faced with a very large, unexpected tax liability for the current tax year (2012)."
According to The Washington Post, this would mean that"…more than 26million households will for the first time face the AMT, which threatens to tack $3,700, on average, onto taxpayers' bills for the current tax year."
What This Tax Change Means for 2013
Right now, the IRS is preparing for the 2013 tax filing season under the assumption that Congress will pass an AMT patch.
Under those circumstances, "The IRS would likely be able to open the 2013 tax filing season with minimal delays for most taxpayers," Miller wrote.
But, if no AMT patch is passed before December 31, 2012, Miller warned, "… in order to allow time for the IRS to make the programming changes necessary to conform our processing systems to reflect expiration of the AMT patch and the credit ordering rules, the IRS would, at minimum, need to instruct more than 60 million taxpayers that they may not file their tax returns or receive a refund until the IRS completes the necessary systems changes."
So, not only would 28 million more American taxpayers owe another $3,700 in taxes, on average, they would not be able to file their returns until late March at the earliest, which would delay their much reduced refunds until May or June.
The U.S. economy is improving at the moment but the combination of an unexpected $3,700 tax bill and tax refunds delayed until late spring might be enough to kill the recovery.
There has been a lot of talk, particularly among Democrats, about using the fiscal cliff as a club to beat what they want out of the Republicans. But, it doesn't seem as if the AMT patch has been taken into consideration. Excluding the AMT, the fiscal cliff is actually more like a fiscal staircase. Not all of the provisions for raising tax rates and sequestration of spending will take place immediately.
But the AMT has an immediate, negative impact on half of all taxpayers and, by extension, on a large chunk of the economy. None of us, regardless of our political leanings, can afford to see Congress fail to act on the Alternative Minimum Tax change before year-end.
Related Articles and News:
- Money Morning:
How to Prepare for Taxmageddon
- Money Morning:
Taxmageddon Just Got More Frightening
- Tax Foundation:
The Fiscal Cliff: A Primer
- The Washington Post:
Middle class faces quick impact from fiscal cliff in form of alternative minimum tax
- The Washington Post:
AMT could keep 60 million taxpayers from filing returns till March, delaying refunds
- The Wall Street Journal:
IRS Warns: AMT Poised to Bite 33 Million Taxpayers.
- CNN Money:
AMT: Biggest fiscal cliff tax headache
- U.S. Chamber of Commerce: