Do you have a spare $2350?
Yesterday at school, one of the speakers expressed frustrations that the general public really doesn’t understand the impact of the fiscal cliff on them. Today, while testing this year’s tax software, I tried to get some new numbers on Alternative Minimum Tax (AMT). A few years ago when we were in the same situation of expiring tax provision, I ran some test returns to see who could look to get hit by AMT if there was no patch. The problem this year was Drake has programed the 2012 AMT to stay the same as 2011. I understand their thinking. We all assume that Congress will do something and the easiest is to renew the patch. If they don’t then Drake can change and update the software. But that meant I had to do the calculations by hand. Since I had to do that, I created a return which assumes that not only is the AMT patch not done but Congress allows the Child Tax Credit and tax rates to revert.
In 2011, Bob and Brenda Jones filed a very simple return. He made $75,000 of W-2 wages for the year. She didn’t work but stayed home with their 2 children. Easy return. After their MFJ exemption and 4 exemptions were subtracted, the Joneses were taxed on $48,600 and their tax was $6444. They qualified for 2 Child Tax Credits of $1000 each. So they wrote a check for $4444 (no withholding).
But this year, assuming Congress doesn’t fix anything, the Joneses will write a bigger check. With the same $75,000 income but higher exemptions and deductions, their taxable income is lower at $47900. But the 10% tax rate is gone so all their income is taxed at 15% and equals $7185. From that, they can subtract Child Tax Credits for 2 children just like last year. But the amount for each credit has reverted to $500 so their tax only goes down $1000 to $6185. And despite only making $75,000 in income, the Joneses qualify for AMT. Their AMT tax is $615 (75,000-45000 (MFJ exemption) =30000 x 26% = 7800 – 7165 (regular tax). Add that $615 to their regular tax after CTC and they are writing a check to Uncle Sam for $6800. Their tax increased by $2,356 from 2011 to 2012.
Something needs to be done the next couple of weeks and there will be taxpayers who will not like the results. But can anything be worse than not doing anything and seeing a lot of hard working people have to scrape together tax money because they lost a game of chicken that they weren't playing?