From Mitt Romney to Warren Buffett, people are clamoring for fairer taxes. But thanks to yet another lapse by our lawmakers in Washington, more than 20 million taxpayers may pay a tax that was originally designed to hit only the ultra-rich -- and the increase could cost you as much as $8,000.
When it was first designed, the alternative minimum tax, or AMT, was meant to make taxes more fair. The idea behind the AMT was to make sure that rich people didn't use deductions to zero out their taxes every year.
Because of inflation, though, the AMT threatens to snare more taxpayers every year. So far, Congress has always acted to pass a "patch" to keep those additional millions of taxpayers from having to pay AMT.
In this election year, though, getting any tax law through the House and Senate will be tough. And If lawmakers don't act, the Congressional Budget Office says that the average tax increase will be $3,900, with some paying more than $8,000 extra.
The worst part of not knowing whether you'll have to pay AMT in 2012 is that if you don't have enough tax withheld from your paycheck, you could end up owing interest and penalties.
What to Do
To be safe, you should consider either raising your withholding or planning to make estimated tax payments, which are due starting in April.
But you do have at least some control over whether and how much AMT you owe. Although the AMT is complicated and involves a host of calculations, the big item that hits most people who pay AMT is state and local tax, whether it's state income tax or the property taxes you pay on your home. Usually, you can deduct those tax payments, but the AMT doesn't allow it.
So if you're in a high-tax state and an AMT patch doesn't come soon, start thinking about whether you can spread those taxes out, paying some in 2012 and some in 2013. If you can, it could help keep you from wasting a potential deduction and getting stuck with the AMT.
More on taxes:
- Tax-free Interest
- Points on a Second Home
- Donate Appreciated Assets to Charity
- Write off Alimony Payments
- Make the Most of Worthless Stock
- Don't Forget Your Carryover Losses
- Beware the Passive Loss Rule
- Pay the Nanny Tax
- Avoid the Underpayment Penalty
- Don't Overwithhold
- Reclaim Excess Social Security Tax
- Write off Medical Insurance Premiums
- More Galleries on DailyFinance