Millions of taxpayers are afraid about the fiscal cliff of tax hikes scheduled to happen at the beginning of next year. What many of those people don't realize, though, is that some big tax increases have already taken effect this year. And without Congress moving quickly to take action, those hikes could add thousands to your tax bill come next April.
Earlier this month, right before taking off for a five-week vacation, the Senate Finance Committee passed a bill that potentially would get struggling taxpayers off the hook. But skeptics note that the bill, as written, has little chance of getting through the House of Representatives, and in an election year, every attempt at progress is likely to face stiff opposition.
When a 'Millionaire's Tax' Hits the Middle Class
The biggest threat to many taxpayers is the alternative minimum tax. The AMT was initially created to make sure that ultra-rich Americans paid at least a minimum amount of tax every year, rather than using deductions and other loopholes to avoid paying any tax at all.
The big problem with the AMT is that it's not indexed for inflation. As a result, Congress has to revisit the issue every year. This time around, it didn't bother taking care of the problem before 2012 began, which could potentially add as much as $8,000 to tax bills for millions of taxpayers.
Taking Care of Business
The Senate proposal would solve the problem for both 2012 and 2013, raising the AMT exemption from $45,000 to $78,750 for joint filers in 2012 and $79,850 in 2013. It would also extend some other favorable provisions, including the ability to make tax-free charitable contributions from IRAs and a deduction for qualified tuition expenses.
But, even though the Finance Committee approved the bill overwhelmingly, it still faces an uphill battle. A controversial provision to extend tax credits for wind energy projects could prove to be a lightning rod for debate and hold up passage.
As painful as Congress's procrastination is, there's little that taxpayers can do but wait and see what happens. As the nation's fiscal situation becomes more uncertain, you can expect situations like this to become all too common.
For more on taxes:
- Mid-Year Tax Checkup: Quick Things to Do Now
- It's Not Too Early to Save Thousands on Your Taxes
- 4 Things New Parents Need to Know About Taxes