The so-called "fiscal cliff" the country currently teeters on can seem quite abstract when looking at the political squabbling going on in Washington these days.
But the potential impact on consumers of a double-whammy cut in government spending and steep tax hikes is very real, experts say. Depending on the decision—or lack of a decision—made by Congress, taxpayers across the board could be facing higher taxes, fewer deductions, and smaller income tax refunds.
Here's a rundown of how consumers could be impacted by potential tax law changes:
Alternative Minimum Tax (AMT) patch. The AMT is designed to ensure that wealthier Americans pay a minimum tax despite legal tax breaks and loopholes available to them. The tax isn't indexed for inflation, so it needs to be updated each year, or "patched," in layman's terms. The AMT has been sucked into the fiscal cliff cyclone engulfing Washington lately because it's part of a broader debate over the extension of Bush-era tax cuts—especially as they relate to more affluent Americans—which expire at the end of 2012.
"If there is no AMT patch enacted by the end of the year, the IRS would be forced to operate the 2013 tax filing season based on the expiration of the AMT patch," acting IRS commissioner Steve Miller wrote in a letter to lawmakers last week. "There would be serious repercussions for taxpayers."
That's because without the patch, the income thresholds of those who have to pay the AMT revert to much lower levels, which would subject tens of millions more Americans to the tax. While just 4 million Americans were required to pay the AMT last year, without the patch, about 33 million would have to pay it for the 2012 tax year.
"That's the big unknown at this point," says Bob Meighan, CPA and vice president of TurboTax. But according to him, it's not likely that Congress will let the AMT patch expire.
"If we look at the historical perspective, the AMT patch has always passed and the general consensus is that it will pass again this year," he says, meaning no additional Americans past the 3 to 5 million that usually pay it will be impacted by the AMT tax.
Tax extenders. High jobless rates and poor economic growth have made the past few years a struggle for many Americans. To help ease financial burdens, the government instituted a broad set of temporary tax laws collectively called tax extenders, including deductions for teachers who purchase classroom supplies and an energy tax credit for homeowners who made certain energy efficient improvements to their existing homes.
"These are specific provisions that have helped people reduce their taxes in the last few years," Meighan says.
With several extenders having expired last year and more slated to expire this year, lawmakers have to weigh the benefits of tax breaks for individuals with the need to get the federal government's finances in order.
Without the extenders, many Americans might be looking at more taxable income and potentially higher taxes.
Bush-era tax cuts. Scheduled to expire at the end of the year, the Bush-era tax cuts are the central issue politicians are arguing about, according to Meighan. But while lawmakers continue to wrangle over whether all the tax cuts should be renewed or only some of them, one thing's for certain, experts say: If Congress does nothing and the Bush tax cuts expire, it means higher tax rates for virtually every American.
The lowest tax rate would tick up from 10 percent to 15 percent, while the highest income bracket would be saddled with a 39.6 percent rate.
While Republicans argue extending the Bush tax cuts—and lower taxes for the wealthy—helps infuse the economy with more money and beef up government revenue overall, Obama has proposed cutting rate breaks for the wealthiest 2 or 3 percent of Americans.
"It's just a matter of which pocket books you're talking about," Meighan says. "Obama has said he's going after the affluent taxpayer's pocketbook [and] it's just a matter of which provisions are going to prevail and which taxpayers are going to take the burden."
Corrected on : Corrected 11/26/2012: A previous version of this article misspelled David Abuaf's name.