Without ‘patch,’ tax implications could be ‘huge’
A failure by Congress and President Barack Obama to reach agreement on tax rates could leave many Americans subject not so much to a fiscal cliff but to a tax spike with a double whammy.
Congress failed this year to exact a so-called “AMT patch,” or legislation that would exempt most Americans from the alternative minimum tax, which sharply limits a variety of deductions.
When Congress enacted it in 1982, it failed to index the tax to inflation, meaning that without constant adjustment, the AMT would expand to catch an ever-greater number of taxpayers.
That Congress has yet to resolve the alternative minimum tax issue permanently “speaks volumes as to the fact that we’ve got a broken tax code,” said U.S. Rep. Scott Tipton, R-Colo.
Without the patch, the reach of the alternative minimum tax could be sweeping, said Jim Grisier, a certified public accountant in Grand Junction.
“It’s going to be huge,” Grisier said, “It’s almost to the point where some folks who get the earned-income tax credit are going to be subject to the alternative minimum tax.”
The alternative minimum tax was intended to limit the deductions to high earners while the earned-income tax credit provides tax relief to low-income earners.
Some estimate that 30 million Americans could be subject to the alternative minimum tax if no patch is enacted.
Failure by Congress and the president to reach a deal will have two immediate implications, said Orville Petersen of the accounting firm of Chadwick, Steinkirchner, Davis and Co.
“If they don’t get something passed, we couldn’t do a 2012 tax return if we wanted to because the tax laws would be up in the air,” Petersen said.
Most wage-earners would see the effect of the lack of a patch in their first 2013 paychecks, which will reflect 2002 withholdings and tax tables, Petersen said.
Each individual case is different, but “it’s going to be a pretty big hit and it is going to happen” in the absence of an agreement, Petersen said.
Plus, many of those people will be liable for 2012 taxes without the protection of the patch. Wage earners also will see their take-home pay decrease by about $20 a week with the expiration of the Social Security tax holiday.