Staying on the High Side of the Fiscal Cliff
by Bob Williams
You got this—all you have to do is start!
We make filing taxes delightfully simple with one, flat–rate price. Every feature included for everyone.Start filing
Wait!! Don't click that "Back" button just yet!
We know you've heard -- and read -- just about everything you can stand about the Fiscal Cliff. And we know it's all enough to make your eyes glaze over faster than Uncle Harvey's fishing stories. But there are some things you need to know -- beyond all the million-dollar-this and billion-dollar-that.
In a way, it's like someone trying to explain the chemical makeup of the atmosphere -- and all you know is, it's getting hard to breathe.
Well, we can't guarantee we can make you breathe easier, but a little knowledge is always helpful. And we're here to help. While the day-to-day news can change by the hour, we can give a little perspective that can hopefully also give you some direction for the coming tax season.
What Fiscal Cliff?
In reality, they could've called the Fiscal Cliff "The Perfect Storm," because it's basically a case of very bad timing. Simply mix in
a batch of looming tax increases and spending cuts in a pot, and you have the makings of a very sour stew. If Congress doesn't strike a deal by Jan. 1, expiring tax cuts won't be extended, and some unpleasant automatic spending cuts will go into effect for defense and domestic programs alike.
The bottom line: Expect to pay a higher tax bill if some sort of agreement isn't reached.
Rocks at the Bottom of the Cliff
For some taxpayers, the biggest bite in this new set of tax teeth may come from the AMT, or Alternative Minimum Tax. First enacted back in 1969 to ensure that the very wealthy didn't get out of paying taxes, the AMT uses a lower tax rate than the regular IRS rules. The catch is, AMT disallows some key deductions (like state and local income taxes, as well as property
taxes), so you're taxed on a higher amount of income.
"No big deal," you say, "I'm not super-rich, so I probably don't have to worry about the AMT."
Not so fast, pardner. What defined super-rich in 1969 has never been adjusted for inflation. Super-rich then can be middle-class now. That means the AMT threshold reaches a lot deeper into the tax-paying public than it did when it was enacted. Lawmakers have traditionally tried to mitigate the inflation problem with patches, basically granting exemptions that take a certain amount of your income out of the calculation. The current patch expires on Dec. 31 -- unless extended by Congress. And if it isn't, the consequences could be far-reaching.
In terms of the Fiscal Cliff, the AMT isn't part of how far we fall. Rather, it's how hard we hit the bottom.
Please Fasten Your Seat Belts …
Steven Miller is Acting Commissioner of the Internal Revenue Service. Miller is letting Congress know just what lies in store if it does't come to an agreement on the AMT patch for 2013. His letter to Congress says as many as 100 million taxpayers could be affected if the AMT patch isn't extended.
Basically, Miller said, the IRS has prepared its computer systems for an extension of the AMT, as they expected would happen. If the patch is not extended, all that system preparation would have to be redone, and Miller stresses that is no easy feat.
"In that event, given the magnitude and complexity of the changes needed … most taxpayers may not be able to file their 2012 tax returns until late in March of 2013, or even later," Miller said.
Keep in mind, the April 15 tax deadline for filing still stands. And that's Problem Number 1. So what traditionally is a three-and-a-half-month tax window for filing your return could be telescoped down to as little as three weeks.
And Miller says because of the expiring AMT patch, the IRS will have to hold off processing millions of returns until there is
resolution, because they might be altered by the changing thresholds. That's Problem Number 2.
"This means that there are certain forms and schedules we could not accept from any taxpayer -- even those who ultimately may not have an additional AMT liability," Miller said. "Similarly, returns of any taxpayers whose income levels may be subject to the AMT could not be processed."
And if it's not clear if a return will be affected by the AMT or not, that return would be held up as well, Miller said.
It's hard to say just how much you will be personally impacted by all these governmental gyrations. The variables are many; the
visible solutions few. And time has not run out -- yet.
There are a few things we can all do to help smooth out some of the impending bumps in the tax road this year. First, prepare now. Get your financial documents ready for filing, so that they are close at hand when you do start the filing process. Second, check our site often for news and tips about your best filing strategies. Third, be patient. We're all in this together, and being upset won't bring us our refund an hour earlier.
Sign up for more of this.
Subscribe to our blog for year–round finance strategies and tax tips. We’re here to remove the dread from filing taxes.