The expiration of the annual AMT patch hasn’t exactly been ignored in the fiscal cliff debate, but it gets a lot less attention than due from its potential impact. Currently, under the annual “patch” that gets applied to the precursor of today’s proposed “Buffett Rule” keeps only 4 million people in the Alternative Minimum Tax by indexing the original law to inflation, which Congress neglected to do in 1969. Without it, 30 million middle-class households will have to recalculate their tax liabilities for 2012, resulting in a paperwork nightmare that the IRS warns might prevent most taxpayers from filing while waiting for Washington to do its job and budget properly:
With fiscal cliff negotiations slowing to a near-halt, the IRS is warning that absent a deal, up to two-thirds of U.S. taxpayers will have to wait next year to file their returns.
In a letter to the top House and Senate tax writers from both parties, acting IRS Commissioner Steven Miller said that between 80 million and 100 million taxpayers won’t be able to file on time. That’s up from a November estimate, in which he told lawmakers that around 60 million taxpayers might have trouble filing.
Most taxpayers wouldn’t be able to file their returns until at least the end of March, Miller said.
Even the IRS won’t be prepared, thanks to their reliance on the usual cycle of annual fixes passed easily by Congress:
Miller said the IRS has programmed its computers to assume that Congress will agree to a last-minute patch, as it has in previous years. But if a deal doesn’t come together, Miller said that millions of Americans will have to wait for the IRS to alter its programs.
“If an AMT patch is not enacted by the end of this year, the IRS would need to make significant programming changes to conform our systems to reflect the expiration of the patch,” Miller wrote.
Many lawmakers have suggested that they could address the AMT in early January if Washington falls off the fiscal cliff. But Miller said that even that scenario creates problems.
“If Congress were to enact a new AMT patch, the time and substantial expense necessary for the IRS to reprogram its systems to reflect expiration of the patch would ultimately be wasted,” he wrote.
What is the AMT? Congress passed it in 1969 under the concern that the wealthy weren’t paying their fair share in taxes. Taxpayers at a certain level of income are required to calculate their taxes with and without the AMT, and have to pay the higher of the two outcomes; originally, though, the wealthy had to pay both AMT and the regular tax. If that sounds familiar, you’ve probably spent a lot of time listening to Warren Buffett. This is exactly the same concept as the Buffett Rule, if not the same exact mechanism.
If Congress keeps passing patches, why don’t they just fix the AMT for good? Ah, well, that gets tricky — because it would have to get scored as a massive revenue reduction on paper, and a tax cut only once. It’s akin to the Medicare doc-fix patches that get applied each year, too. By keeping the AMT in its present form, Congress can manipulate CBO scoring (and the White House can do the same at the OMB) in order to make their budget proposals look better, just as Obama kept the Medicare provider reimbursement reductions in ObamaCare for their cost-cutting impact on the ledger while Democrats pushed the doc-fix bill separately that negated that same impact.
The correct solution would be a systemic reform of our tax code to eliminate all of these gimmicks for good. No one wants to fix the AMT without a large-scale reform of the tax code, though, so don’t expect the AMT trap to disappear soon. The fiscal cliff will mean a deep plunge for the middle class in at least two ways now, unless Congress delinks the AMT patch from the overall negotiations. And unless that’s accomplished soon, the IRS is looking at an enforcement nightmare this spring.