Switch to Desktop Site

How the 'fiscal cliff' deal affects the alternative minimum tax

(Read article summary)

Tony Dejak/AP/File

(Read caption) In this April 2011 file photo, Max Martinez, dressed as the Statue of Liberty, tries to alert motorists on the final day to file taxes. The right thing to do is reform the income tax so that we don’t need an alternative minimum tax to make sure that everyone pays an appropriate amount of tax, Williams writes.

About these ads

In the alphabet soup of Washington, ATRA fixed the AMT, sort of. In English, the newly enacted American Taxpayer Relief Act of 2012 will permanently protect millions of taxpayers from having to pay the alternative minimum tax without Congress having to approve a temporary patch every year or so. It even knocks a few hundred thousand people off the AMT this year. But it still doesn’t really fix the dreaded tax.

Since the first Bush tax cuts in 2001, Congress has protected millions of taxpayers from the AMT with one- or two-year patches. Each patch boosted the amount of income exempt from the tax, saving millions of households from having to pay the levy. The 2011 patch, for example, left just 4.3 million taxpayers owing AMT, down from 29 million who otherwise would have paid the additional tax. Congress never approved a permanent fix because it deemed the revenue loss too high.

With ATRA, Congress bit the fiscal bullet, which the Joint Committee on Taxation pegged at $1.8 trillion over the next decade. It set a higher permanent exemption for 2012 and indexed that and other AMT parameters for inflation. New estimates from TPC show what those changes—in combination with other ATRA provisions—will mean.

One curiosity that won’t please high-income taxpayers: the new Obamacare taxes on investment income don’t count in determining whether you owe AMT. Although the 3.8 percent tax on investment income above unindexed thresholds—$200,000 for single filers and $250,000 for couples—is part of your income tax liability, you leave it out when you calculate whether you owe AMT. Including the new tax when you compare your regular tax liability against potential AMT would protect many high-income taxpayers from having to pay the alternative tax.

The permanent and indexed patch eliminates the need for Congress to revisit the issue every year or so. It also prevents repeated disruption of the tax-filing season. But it’s not a truly permanent fix—the AMT will still hit three or four million often unsuspecting taxpayers each year and will hit more people over time because indexing AMT parameters doesn’t protect taxpayers as their real income grows. TPC estimates that the number of AMT taxpayers will jump 35 percent by 2018.

The right thing to do is reform the income tax so that we don’t need an AMT to make sure that everyone pays an appropriate amount of tax. Given today’s paralyzed political environment, however, don’t hold your breath waiting for that to happen.