Do you know what AMT is? And how would it affect you once the Bush era of tax cut expires? To put it briefly, with the onset of the New Year, you may have to pay more taxes because of an age old tax code called alternative minimum tax or the AMT.
The AMT came into existence in 1969. As the name suggests, it is an alternate way of calculating income tax. In other words, it is a way of computing how much a fixed salary earning individual owes as tax to the government. Those paying the required amount are not required to pay the AMT. If the amount paid to the government is less than the amount owed, as per the normal tax code, then one has to pay the AMT.
As the AMT has not been indexed for inflation, the referenced income level in the AMT has remained static. Once the fiscal cliff comes into effect, it would bring in a large number of people under the ambit of this tax code. Currently, only 4 million people pay the AMT. From 2013 onwards, about 30 million Americans will have to pay it. On an average an those coming under this would have to pay an additional $3,700 in taxes.
The AMT was brought into effect to plug the existing gaps in the system, which the wealthy exploited to their benefit. But over the years, with the rise in incomes levels, more and more Americans have come under this law. To prevent this, the Congress took short term legislative measures in the past. But this year, it has glossed over it.
If the Congress doesn’t act, families with income of $75,000 will be required to pay the AMT. This would severely affect the upper-middle class. Those residing in larger cities will have to bear the brunt of this outdated law.
If the Congress fails to pass yet another AMT patch, taxpayers would have to face the heat.