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AMT could affect many more taxpayers

There are many aspects to the problems posed by the fiscal cliff. For starters, the so-called cliff is really the confluence of two separate issues: expiring tax changes and automatic federal spending cuts.

On the tax side, the political back-and-forth concerning George W. Bush-era income tax cuts gets most of the media attention. But there are actually several different tax issues involved, including payroll taxes and the alternative minimum tax (AMT).

Payroll tax rates were temporarily lowered two years ago, in an attempt to provide an economic stimulus. It remains unclear whether Congress will act to keep those rates from going back to where they were at the end of 2010.

And then there is AMT. The AMT was originally enacted in order to make sure that very wealthy people did not escape paying their share of taxes. It uses very different deduction rules and tax rates than regular taxes. People are subject to the AMT if it is higher than what their regular taxes would be.

Over the years, however, Congress has struggled to keep the AMT exemption levels properly adjusted for inflation. Various AMT "patches" have raised exemption levels, but more and more middle class families have still been affected.

Lawmakers have not passed such a patch this year. As a result, the number of taxpayers subject to the alternative minimum tax could go up greatly. Indeed, the IRS estimates it could approach 30 million.

Consider the numbers. With no patch, the AMT kicks in for income over $33,750 for single taxpayers. For joint filers, it is $45,000. When adjusted for inflation, though, the exemption levels would rise to $50,600 and 78,750 this year, respectively, according to Congressional bills.

The IRS says it is concerned that if the AMT exemption levels are not adjusted, it could result in many taxpayers becoming subject to the AMT for the first time - and therefore unexpectedly facing higher taxes. The lack of an AMT fix could also result in lengthy delays of tax refunds, the acting director of the IRS told Congress last week.

Source: "Lack of AMT fix could delay 100 million tax returns," CNN Money, 12-19-12

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