Warning echoes about Congress as Robin Hood in reverse

12/8/2012

At least we were warned.

A year ago, Norwalk, Ohio, accountant Todd Olsen broke it to my husband and me gently. Unless Congress acted on an obscure tax provision in 2012, our next tax refund would take a serious hit.

We shared our pessimism about politicians acting prudently on anything and went our busy ways. The election monopolized our attention for most of 2012.

But the bean counter’s caveat about Congress failing to take up tax policy aimed squarely at middle-class incomes stayed with me. Facing the so-called fiscal cliff in just over three weeks has brought it to the fore.

The looming threat of a lean refund forced me to become a quick study on a tax I knew nothing about. It’s called the Alternative Minimum Tax.

The AMT was meant for the super-rich who are super-skilled in tax avoidance. It resulted from the Tax Reform Act of 1969.

It targeted high-income taxpayers who could legally claim so many deductions, credits, or other tax shelters that they owed little or no income tax. Basically it set up a parallel tax system to calculate tax liability.

The AMT has a different set of rules from the regular tax, including no breaks for dependents, medical expenses, and state and local taxes.

“There are two separate tax systems,” Mr. Olsen said, “with affected taxpayers required to pay the higher of two results.”

But the number of people who pay that higher AMT bill has been going up every year. That’s because the minimum amount of earned income that is subject to the AMT has not been going up with the rate of inflation.

So moderate-income taxpayers increasingly are socked with a tax designed for upper incomes. Here’s the big catch; Even more middle-class households could be subjected to a higher AMT bill this year if Congress doesn’t act to patch the problem.

Making temporary changes to some of the AMT income parameters is a routine job for federal lawmakers.

Unfortunately, it is also routine for them to leave the corrective tax legislation until the last minute.

The AMT legislation is going down to the wire again, complicated by a host of competing items in the fiscal cliff negotiations. But while politicians wrangle over tax increases and automatic spending cuts, many of us are getting uncomfortably close to paying what we have never paid before under the AMT system.

The higher AMT income exemption amounts for 2011 expired last December. If those earning exemptions are not reinstated before the 2012 tax year closes Dec. 31, the income thresholds revert to much lower levels.

They fall to $33,750 (from $48,450) for single individuals, and to $45,000 (from $74,450) for married couples filing a joint tax return. That means a lot more taxpayers could be shelling out thousands of dollars in higher 2012 taxes, because their incomes were not adjusted out of the AMT.

“Between 26 and 32 million taxpayers may be surprised with hefty tax bills that come due almost immediately,” Mr. Olsen said. That cuts into the refunds people count on to cover pressing needs.

A reduction in disposable income also restricts consumer spending, which could drive a weak economy back into a recessionary rut. Nobody knows what to expect, Mr. Olsen said, “and the uncertainty affecting so many taxpayers and year-end planning has been a nightmare.”

Like other certified public accountants, he’s convinced that no politician, especially one with an eye on re-election, would reach deep into the middle class with a burdensome tax hike. But the relatively noncontroversial tax relief for middle-class taxpayers is held hostage by Republican lawmakers who adamantly are pursuing tax advantages for the wealthy few.

U.S. Rep. Sander Levin (D., Mich.), is the ranking minority member of the House Ways and Means Committee. He said the “consequences of inaction [on extending the expiring AMT relief] would be enormous for millions of middle-class taxpayers.”

It’s an outrageous predicament. But at least you were warned.

Marilou Johanek is a columnist for The Blade. Contact her at: mjohanek@theblade.com