'Fiscal cliff' tumble could affect one-fourth of Minnesota taxpayers
The deadline resolve the budget impasse in Washington is now just days away. Without a deal, the slate of budget cuts and tax hikes known as the fiscal cliff will take effect.
Among the fallout: a tax intended for high-income earners could ensnare up to a quarter of Minnesota taxpayers, including many in the middle class.
The alternative minimum tax has a confusing name. Mary Farmer at Nisswa Tax Service said her clients hear the word "minimum" and think they will get to pay lower taxes.
"Sometimes they just want that minimum tax. We try to explain that's not exactly how it works," Farmer said.
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If anything, the alternative minimum tax probably causes many high-income earners to pay more than they would like.
It was devised to make sure millionaires don't use every possible exemption and deduction to skirt paying Uncle Sam any money.
But the alternative minimum tax or AMT, as it is known, is not indexed to inflation. Every year, Congress has to enact a patch to limit the tax to Americans who are rich by today's standards. Even with the patch, people who are a far cry from millionaires have gotten dinged by the AMT. In a fiscal cliff scenario, even more people will.
A patch has not been legislated for 2012. It's one of the items held up by fiscal cliff talks.
Putting a patch in place is expensive — it adds to the deficit. But without it, the bar for having to pay the alternative minimum tax will drop even lower.
"What we're talking about is many people who we think of as firmly middle class having to pay more money, including some people who have household income between $50,000-$75,000. This isn't just hitting the rich," said Kim Reuben, a senior fellow at the nonpartisan Tax Policy Center.
Reuben said in a fiscal cliff scenario, about eight- times more Americans than usual, about 32 million people, will get dinged with a higher tax bill because of the alternative minimum tax.
In Minnesota, that could mean as many as 600,000 people, or a quarter of the state's taxpayers.
And here's another kicker. While most of the tax increases at stake in the fiscal cliff would apply to tax year 2013, the one involving the alternative minimum tax applies to this year's return.
People might be chagrined to find out that the taxes due April 15 are much higher than they were expecting.
"I'm concerned about the pile-on," said Brad Kaeter of Shoreview. He fears that with the bar lower than usual for alternative minimum tax income thresholds, he could get hit.
Kaeter and his wife have two kids, take a number of tax deductions and credits, and together, pull in about $180,000. Those are all characteristics, which, under a fiscal cliff scenario, could make the Kaeters vulnerable to the alternative minimum tax, and a 2012 tax bill that is about $3,000 more than they were planning for, based on the Tax Policy Center's estimates.
"That's real money. We're standing in place economically in terms of the amount of money our family has coming in, and we're seeing an erosion of what the value of that is as the taxes go up, the property taxes," Kaeter said. "It's a little difficult to watch."
A number of tax experts believe that if Congress does manage to fix any of the policy issues hanging in the balance of budget negotiations, it will be the alternative minimum tax.
But Kaeter said even if the fix comes in, his family probably won't go unscathed. He expects other taxes to rise, or deductions and credits to go away.
"I know something will affect me, I'm just not sure what," Kaeter said."Whether it's in terms of student aid or the mortgage deduction or the social security tax going back up to the normal rate or the alternative minimum tax...We're going to get hit. I'm pretty sure of that."
None of this will sink the Kaeters. They may have to save less for retirement or their kids' college educations. But for many households that are just treading water, the blow from the alternative minimum tax alone could be much more devastating.
