The following editorial appeared in Wednesday’s Wisconsin State Journal:
If you earn more than $33,750 a year, pay attention. You are at risk of owing more federal income tax for 2012 than you thought.
The alternative minimum tax, which once applied only to multi-millionaires, is scheduled this year to reach as far into the middle class as the $33,750 income level for individuals and $45,000 level for joint filers — unless Congress acts.
But what Congress might do about this tax, known as the AMT, is a question tied up in “fiscal cliff” negotiations. Congress could fix the AMT to spare taxpayers, or it could let the AMT hit the middle class to bring in much-needed revenue.
The AMT’s complicated, partially hidden and expanding threat to middle-class taxpayers is exactly why the public should demand that Congress use the “fiscal cliff” as an opportunity to enact full-scale tax reform to make the system fairer, simpler and more transparent.
The AMT was passed in 1969 to make sure the super-rich paid their fair share of tax. It is a parallel tax that excludes several deductions. Taxpayers in AMT brackets are required to figure their tax bill in the regular way and by the AMT, then pay the higher amount.
The AMT has never been indexed to account for inflation. Although Congress has regularly passed temporary patches to restrict the AMT, the patches have failed to prevent the tax from creeping into the upper-middle class and now the middle class. Consequently, the tax has been an expanding cash cow for the federal treasury. The original AMT collected $122 million, which translates to $700 million today when adjusted for inflation. By 2010, AMT collections had swelled to $102 billion.
This year more than 30 million households are at risk of the added tax, up from roughly 4 million in the past. The average AMT bill is expected to be $3,700. And that doesn’t count the extra work in calculating taxes by this additional method.
With “fiscal cliff” negotiations in doubt, the urgency is so great that the acting commissioner of the Internal Revenue Service sent a letter to Congress warning that the IRS may have to notify 60 million taxpayers not to file their 2012 tax returns until the AMT question is settled. That would mean no refunds, at least for a while.
Congress should use this threat to as yet another reason to reform the tax code.