Middle class faces quick impact from fiscal cliff in form of alternative minimum tax

The best hope for a deal to avoid the “fiscal cliff” may lie with the alternative minimum tax, an obscure provision of the tax code that is about to become alarmingly relevant to millions of middle-class taxpayers.

Unless Congress acts by the end of the year, more than 26 million households will for the first time face the AMT, which threatens to tack $3,700, on average, onto taxpayers’ bills for the current tax year. Because those people have never paid the AMT, they have no idea they are in its crosshairs — put there by a broader stalemate over tax policy that has kept Congress from limiting the AMT’s reach.

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Who pays the Alternative Minimum Tax?

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Forget about the much-publicized tax hikes set to take effect for 2013 — if you have a couple of children and annual income over $75,000, chances are good that your taxes are on track to go up substantially for 2012.

Residents of high-cost urban areas, including Washington, would be hit hardest, with about 2 million households in Maryland, Virginia and the District in line to face the AMT for the first time, by official estimates.

Unlike most tax increases in the fiscal cliff, including the expiration of the George W. Bush-era income tax cuts, the AMT bill would come due almost immediately. And tax experts say it would be extremely disruptive to try to fix the AMT after the 2012 tax year closes Dec. 31.

Officials with the Internal Revenue Service and the Treasury Department declined to comment on the impact of adjusting the AMT after December. But congressional tax aides said the IRS has advised Congress that trying to fix the AMT after the filing season begins in January would lead to processing delays of more than two months for nearly half of all returns — significantly postponing the delivery of refunds.

“That would be a disaster, an unmitigated disaster for the taxpayers of the United States. It’s just not possible to do that,” said Nina Olson, national taxpayer advocate at the IRS. Olson noted that many people count on their ­refunds, which average around $3,000, to cover immediate needs. For example, she said, many utilities do not do shut-offs for nonpayment in January and February, because they know people will use their tax refunds to get caught up on their heating bills.

Lobbyists and aides in both parties say it is hard to imagine Congress letting the new year arrive without legislation to restrict the AMT. Optimists say the need to fix the problem could force Republicans and Democrats to come together on a plan to address the fiscal cliff, which comprises $500 billion in tax hikes and automatic spending cuts set to take effect in January, potentially snuffing out the country’s economic recovery.

The alternative minimum tax was created in 1969 to prevent the super-rich from using credits, deductions and other shelters to avoid taxes altogether. In simple terms, it’s a flat tax with two brackets, 26 percent and 28 percent. Breaks for dependents, medical expenses, and state and local taxes are all disallowed. Instead, taxpayers get a single big deduction, called the AMT exemption, which usually rises with inflation. Taxpayers who owe more under AMT rules than under normal tax rules must pay the higher amount.