The American Taxpayer Relief Act of 2012, signed by President Obama on January 2nd, included a permanent AMT (Alternative Minimum Tax) Patch.
The AMT was first enacted in 1969 to make sure the ultra-rich paid their share of taxes. The problem was that it was never indicated for inflation. And as a result, Congress has had to act on a patch each year to adjust for it.
The signing of the permanent patch is helping millions of people avert the AMT by raising the exemption amounts to $50,600 for individuals and $78,750 for couples filing jointly. It also now allows nonrefundable personal credits.
More good news is that the exemption rate will rise as inflation does, it’s one less thing for Congress to deal with each year, and e-filing won’t be delayed because of it.
It’s true that the agreement reached by Democrats and Republicans on January 1st averted a tax increase for 99% of us. Nevertheless, taxes will increase in 2013. Why? Because the reduction in Social Security taxes that we enjoyed in 2011 and that was extended to 2012 will expire. For employees, this means a rate increase of 2%, from 4.2% to 6.2%. For individuals making $50,000 a year, this means having an added $1,000 taken out of their pockets.
Although the argument for letting the 4.2 rate expire is not yet being yelled from the bell towers, it is a legitimate one. In 2010 and 2011, the Social Security tax did not collect enough money to cover the benefits paid out. Even at the rate of 6.2%, some say there will be a continued shortfall throwing us off another fiscal cliff in the not too distant future.
With Social Security costs continuing to rise as more and more baby boomers reach retirement age, we can expect that this discussion won’t go away. So what’s in store – more taxes, reduced Social Security benefits, or both? Time will tell.