It’s an unmitigated source of stress for all of us, the so-called ‘fiscal cliff.’ We cringe, with one eye open, watching the negotiations over our country’s financial health.
But who really pays the price if President Obama and his Republican counterparts can’t reach a deal by Jan. 1?
Most of the talk’s bargaining chips -- at least those publicized to the media -- have centered on higher tax rates for wealthy earners, entitlement reform and a sweeping overhaul of tax deductions.
But relatively few conversations have highlighted the importance of addressing the Alternative Minimum Tax, a now near-archaic tax provision passed under the Nixon Administration that has major implications for today’s middle class.
The AMT was designed to ensnare high-income earners trying to evade taxes. In the first year it was enacted, the provision targeted 155 households.
Now, the AMT affects millions, and that number could skyrocket if Congress doesn’t take action to ‘patch up’ the law before the year ends.
“The AMT was originally designed to capture only a small number of people at the upper echelon,” said Bill Harris, former CEO of PayPal and Intuit and current CEO of Personal Capital. “But because it has not been adjusted for inflation over the years, or not adequately so, it now impacts a very large and very substantial number of households.”
If Congress doesn’t include an AMT fix in its debt deal, or fails to reach a deal, the fallout for the average middle-class family would be around $3,700, according to the Tax Policy Center.
Those are households with income generally between $50,000 and $200,000.
In a recent letter to Capitol Hill, the IRS commissioner forecast the number of people directly hit by the AMT would rise from 5 million to 33 million, absent Congressional intervention.
Now, consider the ‘wealthy’ taxpayer.
According to Harris, very affluent Americans- those with assets of $1 million or more- will absolutely see a difference in their taxes, with a deal or without one.
That’s because income tax rates are set to revert to their highest levels since Bill Clinton was in office, with additional hikes on capital gains and dividends due to the Affordable Care Act.
Americans with incomes that grossly exceed the threshold for the highest tax bracket, $388,350, will lose a substantially higher portion of their income.
But for those stuck in the middle, observed Harris, the impact is much more blunted.
That’s because the tax hikes are marginal, not effective.
“Take somebody who, let’s say they’ve living in a high-cost area like San Francisco and making $300,000,” Harris said. “The impact of additional taxes on them is only on the $50,000 addition over $250,000 [or whatever number Congress settles on], not on the entire amount.”
So by extension, someone making $300,000 will only pay an additional $1,500 to Uncle Sam if Congress sets the tax hikes at $250,000 and up.
That equates to .5 percent of the taxpayer’s income.
A woman making $100,000, however, who gets sucked into the AMT and ends up paying an additional $3,700, would see 3.7 percent of her income go away.
Does that seem fair to you?
The point is it’s not fair, certainly to the middle-class taxpayer, if Congress fails to address the AMT in its ever deliberate, ever painstakingly slow negotiations.
