The wicked witch of the tax code is almost dead.
By passing the “fiscal cliff” deal hammered out between the White House and Senate Republicans, Congress has finally found a permanent patch to the Alternative Minimum Tax, a piece of tax code that has morphed from provision to make sure the rich paid their taxes to a trap that has threatened to ensnare the millions of middle class Americans.
The problem was inflation. What Congress considered rich thirty years ago is solidly middle class now.
Almost every year, Congress has had to pass temporary legislation to fix the recurring glitch in the tax code. Along with the so-called “doc fix,” which Congress regularly passes to prevent a dip in payments to doctors and hospitals who treat Medicare patients, the Alternative Minimum Tax “patch” is among the most dreadfully boring yet necessary things Congress does each year. Lawmakers usually wait until the last minute.
“They do the ‘doc fix,’ they do the AMT, and they do the other normal extenders like the R & D [research and development] tax credit at the last possible minute, or a little bit after,” said Chad Stone, chief economist at the Center for Budget and Policy Priorities. “It has not been fixed for this year. They’re dead up against having to fix it for this year or having a real problem with forms and what have you.”
Since 1969, the U.S. tax code has featured some form of minimum tax, to prevent people who make a lot of money from avoiding taxes by claiming deductions. Since 1978, that’s been something like the current Alternative Minimum Tax — a 26 or 28 percent rate that applies to a calculated subset of a person’s income.
This has always been a fraught endeavor. The AMT isn’t indexed to inflation, so the income thresholds need constant changing. After a year of inflation, the old income levels don’t mean the same kind of wealth. Consequently, Congress has had to modify it at least 19 times since its 1969 inception — in 1971, 1976, 1977, 1978, 1982, 1986, 1990, 1993, 1997, 1998, 2001, 2002, 2003, 2004, 2006, 2007, 2008, 2009, and 2010 — sometimes passing an AMT “patch” that covered two years, according to the Congressional Research Service.
Right now, Congress really is up against it. Having failed to act last year, Congress needs to retroactively fix the AMT thresholds for 2012, before people start doing their taxes for April.
Making matters worse, the AMT thresholds don’t just revert to last year’s; they reset to 1993′s. In 2011, unmarried taxpayers had to calculate (but not always pay) AMT taxes if they made over $48,450, while a $74,450 threshold applied to married couples. If Congress does nothing, those levels reset to $33,750 and $45,000 respectively.
That would expose middle and lower-middle-class families to a 26-percent tax rate on certain types of deducted income — significantly more than what they’re paying on income across the board. According to one estimate cited by a GOP aide to the Senate Finance Committee, 28 million families would fork over an average $3,400 extra next year, unless Congress does something.
When the Senate passed its fiscal-cliff deal, it graciously indexed the AMT to inflation. That would put this nagging issue to bed for good … if the House follows suit. (Check for the latest on the House debate.)
“Far from perfect, this legislation does include a permanent fix to the ever-growing AMT, giving millions of hard-working, middle-class families certainty that the nightmare of this tax has finally come to an end,” Orrin Hatch of Utah, the Senate’s longest-serving Republican and ranking member of the Senate Finance Committee, told ABC News.
When confronted with deadlines, Congress often melts down like a tired, hungry toddler at Walmart, tears of rage streaming down its face. This week has proven no different.
Until the House decides it can live with a version of this deal, the nightmare will live on for Hatch, middle class families, and anyone who’s watched Congress vote on the AMT almost every year.