The Independent Market Observer

11/16/12 – Something Taxpayers Should Know About the Fiscal Cliff

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Nov 16, 2012 9:47:16 AM

and tagged Fiscal Cliff

Leave a comment

I am not a tax expert, and I don’t even play one on TV. In fact, I’m normally reluctant to weigh in on taxes, but there is one issue that doesn’t seem to be getting the attention I think it deserves: the expansion of the alternative minimum tax, better known as the AMT.

Briefly, if you are above a certain income threshold, you have to calculate your tax bill both the normal way and under the AMT rules, which limit certain deductions and typically result in a bigger tax hit. You then pay the higher of the two. This can be a nasty shock if you’re not expecting it, as the additional liability can run into the thousands.

The AMT was created to ensure that high-income households could not use deductions and exemptions to reduce their tax bills too much—that is, to ensure that everyone paid their fair share. The problem is that the base where the AMT kicked in was not indexed for inflation, so every year more people would be considered “high income” and subject to the AMT. Congress has acted every year to address this and adjust it on an ad hoc basis, but the problem still remains.

Which brings us to the present. If we go off the fiscal cliff, literally millions of additional households will be subject to the AMT and will find their tax bills increasing, probably substantially. What’s more, this may well come as a total surprise in April 2014, as their tax preparers run both calculations and deliver the bad news. For people who do their own taxes and don’t realize they have to run both sets of numbers, the news could be even worse when the IRS catches them and assesses interest and penalties.

This is not only an economic nightmare, but a political one as well. Having started companies and filed quarterly returns, I’ve often thought that the only thing that allows out tax system to work is paycheck withholding. If taxpayers had to write a check every quarter, the way the self-employed or business owners do, there would be a revolution. Putting the AMT front and center like that, and requiring millions of households to write a large check, might do the same.

I don’t think there’s anything the average reader of this blog can do about it—although, certainly, if a Congressperson is reading this, a fix should be a high priority. I mention it, first, as something that should be discussed more and, second, as an example of the kind of unintended and destructive consequences we will face if we go off the cliff. Pay attention, as there will be more of them.

Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®