Taxmageddon, the Bush Tax Cuts, the Middle Class and the AMT

The House of Representatives passed an extension of the Bush tax cuts and it will meet stiff opposition in the Democrat controlled Senate. The Democrats have defined the Bush tax cuts as exclusively being tax cuts for the rich or the 1%. It's simply not true. Because of inflation, the Alternative Minimum Tax (AMT), was created to close tax loopholes for high income earners.  However, the AMT has ensnared millions of middle class taxpayers into its orbit.

According to Forbes, the AMT is a middle class nightmare that Congress just refuses to fix.

Alternative minimum tax. This shadow tax system, created in 1969 to ensure a small number of rich folks paid at least some tax, afflicted 4.3 million upper middle class households in 2011 and in 2012 is menacing an additional 27 million...Of course it is Congress itself that created this peril. First, as part of the 1981 Reagan tax cuts, it indexed regular tax brackets, but not the AMT, for inflation. Then, in 2001, it made the Bush tax cuts look cheaper than they really were by cutting regular tax rates but not the AMT rate. Without those two bits of politically expedient tax writing, fewer than half a million families would now be paying the AMT, according to calculations by researchers at the Tax Policy Center. Those who owed AMT for 2011 had to wrestle with the 54-step Form 6251, Alternative Minimum Tax and possibly the 57-step Form 8801, Credit for Prior Year Minimum Tax, too. Sure, using software like Intuit’s TurboTax or H&R Block’s At Home makes the calculations manageable. But the AMT still makes planning difficult and punishes innocent folks with no more exotic “tax shelters” than high state and local tax deductions or lots of kids. It also raises real money—$39 billion in 2011...

The term Taxmageddon is no exaggeration.  This is how it will impact ordinary wage earners according to an Education News article titled Taxmageddon: Tax Tsunami Could Hit January 1, 2013

Roberto and Juanita have an Adjusted Gross Income (AGI) of $70,662. They are concerned about the looming Taxmageddon tax hikes and want to know how it will affect them. Their taxes will go up $4,138 next year due to Taxmageddon. After 2013, they will see a somewhat higher level of taxation (higher than the $4,138 tax hike for 2013).

2. Example #2 — Baby Boomer (AGI = $95,099)

Charles and Janet have an Adjusted Gross Income of $95,099. Due to the Taxmageddon, their taxes in 2013 will be $4,223 higher than in 2012. Each year after 2013, they will pay at least $4,200 more in taxes than they will pay in 2012. The later years will be higher than 2013 as Obamacare taxes are fully implemented. Of course, their tax bill will depend on their income in future years. 3. Example #3 — Low-Income Worker (AGI = $24,757)

Frank has an Adjusted Gross Income of $24,757. He does not consider himself a “low-income worker.” He works hard and earns a steady living but he is on a tight budget. He cannot afford a tax increase of any kind. Unfortunately, Frank will have to pay an additional $1,207 in taxes next year because Congress did not address the Taxmageddon nightmare. He will have to pay at least $1,200 each year thereafter to the IRS.

4. Example #4 — Millenial (AGI = $23,917) Teasha has an Adjusted Gross Income of $23,917. She has just started her career and is glad she was able to find a job. (Many of her friends have not been as fortunate and are living with their parents.) Teasha is also on a tight budget and wants to know what impact Taxmageddon will have on her. She will face a tax hike in 2013 of $1,099. She must pay similar tax amounts in subsequent years. 5. Example #5 — Retiree (AGI = $42,553)

Su Lin and Jun have an Adjusted Gross Income of $42,553. They are retired and live on a fixed income (mostly from Social Security and their retirement account). Because their income is fixed, it increases only slightly with cost-of-living adjustments. For their situation, they will see an increase of $857 in their 2013 tax bill. They will pay about $860 more in subsequent years than they pay in 2012.

The above cited examples are not rich folks but they are indeed middle class folks who will get clobbered with higher taxes.

The Tax Foundation did a study on the state by state impact of failing to renew the Bush tax cuts.

How the States Would Be Affected by Extension of the Bush Tax Cuts and Other Provisions

Generally, high-income states would receive the largest tax relief, because they pay the most taxes under our extremely progressive federal income tax code. They are also the states most affected by the AMT. New York, for instance, would save about $51 billion in taxes, or 8.05 percent of income, if these tax cuts were extended, including the AMT patch. That amounts to $5,452 per tax filer. More than half of that (62 percent) is due to the AMT patch. California would save about $71 billion in taxes, or 6.89 percent of income, if all tax cuts were extended. That amounts to $4,242 per tax filer. Again, more than half of that (60 percent) is due to the AMT patch.

The Bush tax cuts included a built-in temporary fix for the AMT nightmare but this temporary fix will expire if the Bush tax cuts expire on 12/31/12.

Meanwhile, we've got the liberal media claiming that the Bush tax cuts only benefitted the 1% as they clamor for more taxes on the rich when in fact they are advocating for massive taxes on the middle class. The anti-middle class Huffington Post let loose with an emotionally charged and blatantly inaccurate assessment of the Bush tax cuts while calling for higher taxes.

Expiration of Bush Tax Cuts for the 1 Percent Are a Step Forward, But Not Enough

President Obama is currently confronting mostly Republican opponents over whether to extend the Bush tax cuts to the richest 1 percent of taxpayers. Between 1979 and 2007, the richest 1 percent received three-fifths of all the income gains in the country. Most of this went to the richest 10th of that 1 percent, people with an average income of $5.6 million (including capital gains).

While it may be true that the 1% are indeed the primary recipient of income gains, that's because of the corrupt financial system, the corrupt political system, crony capitalism, corporatism, the scourge of the regulatory state and the determination of the left to forcibly impose a Soviet styled command and control economy upon America.  For the Huffington Post to deceptively assert that the Bush tax cuts only apply to those with an average annual income of $5.6 is beyond disingenuous, it's outright journalistic fraud.

The solution to our economic and fiscal nightmare is economic liberty and sound money, something shunned by both the Republicans and the Democrats.  The Republicans may be advocating for an extension of the Bush tax cuts simply because it's politically expedient in an election year but they hardly have the moral high ground on the issue.  The Republicans love cutting taxes to appease its base but they also has a severe spending disease.  Republicans truly believe that spending doesn't matter!

Republican have an Incurable Spending Disease

The Tea Party Republicans Spent More Than the Dems They Replaced.

A logical and sane person would conclude that Congress Critters should be motivated to fix the AMT problem.  However, such is not the case and the middle class routinely gets pounded with taxes despite all the spin of both parties.