Millions Face a Hit if Fix for Minimum Tax Fails to Pass

for chrissake Congess, at least pass the AMT fix  !!

    Updated December 20, 2012, 8:31 p.m. ET

Millions Face a Hit if Fix for Minimum Tax Fails to Pass
By JOHN D. MCKINNON

Buried within the mass of tax and spending provisions known as the fiscal cliff is a problem that could cause grief for taxpayers and the Internal Revenue Service.

It is the alternative minimum tax, a provision adopted in the 1960s to make sure the very wealthiest didn’t avoid taxes by accumulating too many deductions and credits. It wasn’t indexed for inflation, and Congress has repeatedly passed an annual exemption to protect middle-class families from the tax.
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Congress hasn’t passed that extension for this year. And with talks over avoiding the fiscal cliff stalled, it may not pass one. If it doesn’t, the tax will hit almost 30 million additional households, and could hit some couples making as little as $45,000 and individuals making as little as $33,750, according to the IRS. Just four million households had to pay the tax in 2011.

The average tax increase for affected households would total almost $3,700 for 2012, according to the Tax Policy Center. Married taxpayers in more affluent, higher-tax states would be hit hardest, because they tend to accumulate the types of tax breaks that the AMT targets.
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To be sure, it is possible an AMT extension will be passed early next year as part of a larger budget deal or on a stand-alone basis. It’s unclear how the IRS would deal with that.

The AMT problem is just one of a host of provisions that are usually addressed at the end of each year. This year, they have been swept up into the broader melee that is the fiscal cliff, the $500 billion in tax increases and spending cuts set to start in early January.

Failure to pass the AMT exemption could lead to another problem—delayed tax filings and refunds for as many as 100 million households, the IRS says. That is because the IRS would have to delay filing by any taxpayers who might be subject to the AMT, while it overhauls its computer programs.

Unless Congress passes an AMT exemption by the end of the year, “most taxpayers may not be able to file their 2012 tax returns until late March of 2013, or even later,” acting IRS commissioner Steven Miller said in a letter to lawmakers this week. The retired IRS commissioner, Doug Shulman, warned at a recent conference of “real chaos” if that happens.

Normally, the IRS would pay about $200 billion in refunds from January through March, according to Lou Crandall of Wrightson ICAP. Many families count on those refunds to pay bills, and the cash often provides a welcome boost for local economies in the post-holiday lull.
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About 75% of households would also see their take-home pay reduced starting in January if Washington lets the payroll-tax cut expire, as seems likely, because neither the White House nor Republican leaders are proposing an extension. That means workers’ payroll-tax rate will rise to 6.2% from 4.2% next year, and employers will boost the amount they withhold from paychecks. For a typical taxpayer making $50,000, this will add up to an average of $1,000 more in taxes for the year.

Physicians also face deep cuts in the reimbursements they receive under Medicare, unless Congress adopts a temporary fix. The problem stems from a 1997 budget deal that imposed spending curbs that proved to be unexpectedly strict.

Numerous temporary business tax breaks expired a year ago or are scheduled to expire on Dec. 31. These include a big credit for corporate research, as well as breaks for alternative-energy producers and for banks operating overseas. If Congress doesn’t agree to extend them, businesses will be hit with bigger tax bills for 2012.

The list of these temporary breaks has grown from a handful in the 1980s to more than 40.

In theory, Congress could address any of these issues independently of the fiscal cliff negotiations. But there are no signs lawmakers will take them up apart from other major budget legislation.

Write to John D. McKinnon at [email protected]

A version of this article appeared December 21, 2012, on page A4 in the U.S. edition of The Wall Street Journal, with the headline: Millions More Could Face AMT Hit.

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