This year, fixing the tax has become more complicated as Congress and the White House wrestle with the large automatic tax increases and spending cuts coming in January, a combination known as the fiscal cliff.
Normally, lawmakers would pass the AMT patch along with other noncontroversial extensions of expiring temporary tax provisions. Some on Capitol Hill would like to clear away those issues first before tackling the much more contentious fiscal cliff issues.
But other lawmakers want to keep the AMT linked to the fiscal cliff because it adds to the consequences for average Americans of not striking a deficit-reduction deal by the end of the year.
“This year, as in every year, there is a strong bipartisan desire to patch it,” said Edward D. Kleinbard, a University of Southern California law professor and former chief of staff of Congress’ Joint Committee on Taxation. “It’s just being held hostage.”
The AMT is, in effect, a second tax system, Kleinbard said.
It has a lower rate, but does not allow many important deductions, particularly the ability to deduct state and local taxes. That makes the AMT more of a threat to people in California and other high-tax states, he said.
“People think the AMT is for fat cats or for tax-shelter junkies and then they discover it, in fact, applies to regular folks,” he said.
A person whose annual taxable income is above the threshold must figure out how much taxes are owed under the AMT system and under the regular tax system. The person then pays the higher amount.
“It’s insane to have two rival tax systems, side by side, that apply to millions of people,” Kleinbard said. “And it’s also absurd that every year we’re required to participate in this roller coaster of ‘Will Congress patch it or not?’”