The Wall Street Journal reports this morning that Obama is going to ask for $1.6T in new taxes when he speaks on Friday. The only way that this sized tax increase could be accomplished is if the AMT tax is indexed to inflation and hits tens of millions of of additional taxpayers.
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I have warned readers about the possibility that the AMT tax is going to go mainstream in 2013 here [9] and here [10]. Yesterday, the IRS came out with its own warning.
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In 2012, about 4m taxpayers will get stuck paying the AMT tax. As the WSJ headline suggests, that number could go to 33m in 2013. That’s a massive increase; it will cause all sorts of problems. From the IRS letter to Senator Hatch re the AMT:
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.
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.
(Note: Even if you do not owe AMT, you have to fill out and file the AMT forms.)
About 28 million taxpayers would be faced with a very large, unexpected tax liability for the current tax year (2012).
(Note: The AMT patch actually expired in 2011; a one-year exemption was granted, but the exemption is not effective if not re-patched. This was a legislative “time bomb” that was included in the deal that created the fiscal-cliff (debt ceiling deal).
Okay, got that? The AMT is a disaster. It will force 60m people to confront a very complicated new set of tax forms (I know, I have paid AMT for years). It will be retroactive. It will cause 30m people fits when they realize they will have to pay out of pocket or get a much smaller refund for 2012.
But, there is another side to the AMT. It does exactly what everyone says is needed.
-It raises a ton of revenue; $1Tn over ten-years. (More than the Bush tax on the +250K folks)
-It eliminates all deductions for high-income earners. (The mortgage tax deduction is carved out however).
-It broadens the base.
-Allowing the AMT patch to elapse does not increase tax rates; it establishes a minimum tax rate (currently 28%). This would allow Republicans to claim that they successfully fought off an increase in marginal tax rates. Democrats would be able to say they increased taxes on the rich.
I think the AMT tax is a conundrum that has to be fixed. It is the most heinous aspect of the fiscal cliff. I say that because it is the only tax related to the fiscal cliff that has negative implications for 2012 (everything else is forward looking). Can Congress fix the problems with AMT? Sure they can. There are dozens of options. But Congress must act to fix the problem, they simply can’t “do nothing” as has been suggest by some Democrats.
I was not aware that the AMT had retroactive tax consequences for 2012. That it does, is a game changer. If we go down the road towards no compromise, and AMT becomes a reality for all taxpayers, the consequences of the fiscal cliff will be much larger than has been discussed in the press. Taxpayers would be crushed in 2013 if there is no action. Not only would most workers face much higher taxes for 2013, they would also get hit with much higher tax liabilities when they sit down and calculate what they owe for 2012. This double whack to the incomes of tens of millions of people would cause a recession far more severe than the one that CBO thinks might happen (small drop in GDP in 1st half 2013).
As a ten-plus year payer of the AMT, I say to all, the AMT is truly a dreaded tax. If allowed to expand, it will wreck many taxpayers’ plans on how they should live and work:
-Childcare costs would no longer be deductible. (Don’t have that child)
-Charitable contributions would not be deductible. (Don’t give money to your Church or any other worthwhile charity)
-Real estate taxes would no longer be deductible. (Don’t buy a house, it will be much cheaper to rent than buy on an after-tax basis.)
-State income taxes paid would no longer be deductible. (Move out of California, New York and Illinois as fast as you can.)
I’m one of the 4m people who has been stuck with this tax for the past decade. I’m praying for relief. I want the AMT abolished. But, for the life of me, I can’t see how that can happen. If there were a compromise on the fiscal cliff that resulted in the +250K crowd getting their marginal tax rate increased from 35% to 39.5% (the Obama plan) then I would end up paying LESS taxes then if I was subject the current AMT.
(Note: I live in a high income tax state, and pay high property taxes. I would be much better off with those deductions than without, even if the marginal tax rate is increased)
So they can’t do that. Guys like me can’t be getting a tax break as a result of the fiscal cliff. That outcome would be a complete joke (I would love it). This argues in favor of making the AMT permanent (the 2012 look-back could be easily patched).
I say again, AMT is a heinous tax, but it looks like it is going to become a reality anyway. The IRS has said that there will be big problems if AMT is allowed to impact large numbers of taxpayers. But without a minimum tax rate, revenues would fall (me). If AMT is expanded, the 30 odd million that pay the price ,will just hate the outcome. Get ready.
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