This from Bruce Krasting:

The Wall Street Journal reports this morning that President Obama is going to ask for $1.6T in new taxes when he speaks on Friday. The only way that this sized tax increase could be accomplished is if the AMT (Alternative Minimun Tax) is indexed to inflation and hits tens of millions of of additional taxpayers.

In 2012, about 4m taxpayers will get stuck paying the AMT tax. As the WSJ headline suggests, that number could go to 33m  in 2013. That’s a massive increase; it will cause all sorts of problems. From the IRS letter to Senator Hatch re the AMT:

If there is no AMT patch enacted by the end of the year, the IRS would be forced to operate the 2013 tax filing season based on the expiration of the AMT patch. There would be serious repercussions for taxpayers.

The changes to the AMT exemption amount and the special tax credit ordering rules could affect more than 60 million taxpayers – nearly half of all individual income tax filers.

 (Note: Even if you do not owe AMT, you have to fill out and file the AMT forms.)

About 28 million taxpayers would be faced with a very large, unexpected tax liability for the current tax year (2012).

(Note: The AMT patch actually expired in 2011; a one-year exemption was granted, but the exemption is not effective if not re-patched. This was a legislative time bomb that was included in the deal that created the fiscal-cliff (debt ceiling deal).

Okay, got that? The AMT is a disaster. It will force 60m people to confront a very complicated new set of tax forms (I know, I have paid AMT for years). It will be retroactive. It will cause 30m people fits when they realize they will have to pay out of pocket or get a much smaller refund for 2012.

I think the AMT tax is a conundrum that has to be fixed. It is the most heinous aspect of the fiscal cliff. I say that because it is the only tax related to the fiscal cliff that has negative implications for 2012 (everything else is forward looking). Can Congress fix the problems with AMT? Sure they can. There are dozens of options. But Congress must act to fix the problem, they simply can’t do nothing as has been suggest by some Democrats.

I was not aware that the AMT had retroactive tax consequences for 2012. That it does, is a game changer. If we go down the road towards no compromise, and AMT becomes a reality for all taxpayers, the consequences of the fiscal cliff will be much larger than has been discussed in the press. Taxpayers would be crushed in 2013 if there is no action. Not only would most workers face much higher taxes for 2013, they would also get hit with much higher tax liabilities when they sit down and calculate what they owe for 2012. This double whack to the incomes of tens of millions of people would cause a recession far more severe than the one that CBO thinks might happen (small drop in GDP in 1^st half 2013).

I say to all, the AMT is truly a dreaded tax. If allowed to expand, it will wreck many taxpayers’ plans on how they should live and work:

-Childcare costs would no longer be deductible. (Don’t have that child)

-Charitable contributions would not be deductible. (Don’t give money to your Church or any other worthwhile charity)

-Real estate taxes would no longer be deductible. (Don’t buy a house, it will be much cheaper to rent than buy on an after-tax basis.)

-State income taxes paid would no longer be deductible. (Move out of California, New York and Illinois as fast as you can.)

 Bruce Krasting