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A "Lady Liberty" mascot for Liberty Tax Service worked before filing deadline last year.

Star Tribune, Brian Peterson

AMT could sock millions of new households with hefty tax

  • Article by: LORI MONTGOMERY
  • Washington Post
  • November 5, 2012 - 10:34 PM

WASHINGTON - The best hope for a deal to avoid the "fiscal cliff" may lie with the alternative minimum tax, an obscure provision of the tax code that is about to become alarmingly relevant to millions of middle-class taxpayers.

Unless Congress acts by the end of the year, more than 26 million 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. Because those people have never paid the AMT, they have no idea they are in its crosshairs -- put there by a broader stalemate over tax policy that has kept Congress from limiting the AMT's reach.

Forget about the much-publicized tax hikes set to take effect for 2013 -- if you have a couple of children and annual income over $75,000, chances are good that your taxes are on track to go up substantially for 2012.

Residents of high-cost urban areas would be hit hardest, by official estimates.

Unlike most tax hikes in the fiscal cliff, including the expiration of the Bush era income tax cuts, the AMT bill would come due almost immediately. And tax experts say it would be extremely disruptive to try to fix the AMT after the 2012 tax year closes Dec. 31.

Officials with the Internal Revenue Service and the Treasury Department declined to comment on the effect of adjusting the AMT after December. But congressional tax aides said the IRS has advised Congress that trying to fix the AMT after the filing season begins in January would lead to processing delays of more than two months for nearly half of all returns -- significantly postponing the delivery of refunds.

"That would be a disaster, an unmitigated disaster for the taxpayers of the United States. It's just not possible to do that," said Nina Olson, national taxpayer advocate at the IRS. Olson noted that many people count on their refunds, which average around $3,000, to cover immediate needs.

Lobbyists and aides in both parties say it is hard to imagine Congress letting the new year arrive without legislation to restrict the AMT. Optimists say the need to fix the problem could force Republicans and Democrats to come together on a plan to address the fiscal cliff, which comprises $500 billion in tax hikes and automatic spending cuts set to take effect in January, potentially snuffing out the country's economic recovery.

The alternative minimum tax was created in 1969 to prevent the super-rich from using credits, deductions and other shelters to avoid taxes altogether. In simple terms, it's a flat tax with two brackets, 26 percent and 28 percent. Breaks for dependents, medical expenses and state and local taxes are all disallowed.

Instead, taxpayers get a single big deduction, called the AMT exemption, which usually rises with inflation. Taxpayers who owe more under AMT rules than under normal tax rules must pay the higher amount.

Over the decades, the AMT has ceased to affect the extremely rich, because their tax bills are higher than the AMT rates. Instead, the inflation-adjusted AMT has come to target 4 million to 5 million taxpayers with annual incomes between $200,000 and $1 million.

This year, however, a gridlocked Congress has failed to approve the inflation "patch" that prevents millions of people from falling into the AMT's grasp. The last patch expired in December. If a new one is not enacted, the AMT will hit 31 million taxpayers this year, reaching deeply into the middle class.

Nationwide, nearly one in five taxpayers is in line to pay the AMT. And while the levy is causing bipartisan nightmares, urban states -- which tend to lean Democratic -- are by far the most vulnerable.

That poses a challenge for Democrats planning to use the fiscal cliff as leverage to force Republicans to raise taxes on the wealthy to help reduce the federal budget deficit. President Obama has threatened to veto legislation that extends the Bush tax cuts for the wealthiest 3 percent of households, a top GOP priority.

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