Taxpayers probably won't have a clear idea of their 2012 tax obligations until the last minute this year — and possibly not even then. They could find themselves owing several thousand dollars in
income tax that they didn't plan for and may not be able to afford.
That is because the alternative minimum tax is caught up in the negotiations about how to avoid the looming fiscal cliff, and, unfortunately, it is likely to be a key bargaining chip in the negotiations.
Democrats think they have the upper hand because of President Barack Obama's re-election and his threat to veto any plan that doesn't increase taxes on the rich. They will be able to blame Republican obduracy if the cliff isn't avoided, huge tax increases hit everyone and the economy falls back into recession.
However, the Republicans think that the AMT patch is a vital weapon in their negotiating arsenal, as those hit hardest by the tax would be upper-middle-class residents in Democratic strongholds — large coastal cities with high local income and property taxes.
For example, in heavily Democratic Maryland, about 6% of taxpayers owe the AMT each year. Without a patch, that number would jump to 38%.
Republicans are unlikely to agree to the AMT extension without something in return, because their view is that the Democrats will be unwilling to antagonize their core voters by letting the AMT affect more of them.
Congress typically passes a one-year patch to prevent the AMT from biting millions of middle-class taxpayers. The tax originally was aimed at high-income earners who used loopholes to avoid paying much income tax, but it wasn't indexed for inflation, and what was once a high income is now a middle-class one.
The result is that without an annual patch, more and more middle-class taxpayers will be required to pay the AMT.
If no action is taken this year, an estimated 28 million taxpayers will be subject to the tax, and they will face an average unexpected bill of $3,700 for 2012. Most haven't allowed for it in their withholding because they have never had to pay it.
BUSH-ERA TAX CUTS
By contrast, if the George W. Bush-era tax cuts are repealed, the higher taxes won't be due until next year's filing season, and withholding could be raised to pay it.
If the Republicans continue to refuse to let income tax rates rise now for high-income taxpayers, Democrats could let the country go over the fiscal cliff as they have threatened. They would allow increases for all taxpayers and then restore lower rates for those earning less than $200,000 a year in the next session of Congress, when they will have more votes.
However, the Internal Revenue Service has warned that without an AMT patch, the 2012 filing season will be a mess. That's partly because the Internal Revenue Service hasn't programmed its computers to allow for the full AMT.
That would have to be done, and tax forms would have to be reprinted. At the very least, refunds probably would be delayed for months — weakening the economy.
Even if the new Congress were to pass a patch retroactively in the first session after the New Year, a period of uncertainty would sap economic vitality.
It is unacceptable that millions of people should have no clear idea of their income tax liabilities so late in the year, and it is another reason that the income tax code must be revised and simplified. Year-by-year AMT patches can't continue.