By John C. Dvorak
BERKELEY, Calif. (MarketWatch) — H&R Block has sent out a memo to some of its customers about the problems they are likely to encounter with their 2012 tax payments. This is the part of the fiscal cliff nobody seems interested in talking about.
Once people realize that they will be paying much more in 2012 taxes then expected, you can kiss the market goodbye. Unless the fiscal-cliff issues are resolved by year-end, I would be in all cash.
The tech sector, since it relies so much on discretionary purchases, will be hit hardest.
This is about the “alternative minimum tax,” which relatively few Americans have ever paid. It’s a secondary calculation that should have been eliminated from the tax code years ago and tends to affect something like 4 million high-income Americans. It is estimated that 30 million Americans will be subject to it for 2012.
In 2011 the exemption from this tax for married people filing a joint tax return was $447,800. The fiscal-cliff situation allows the AMT to revert to older values not adjusted for inflation.
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Few news outlets have even mentioned this problem. I learned about it when Georgetown University law professor and tax expert John Buckley discussed the details on C-SPAN. See ”Washington Journal” interview with Buckley at the C-SPAN website .
According to Buckley, this AMT exemption for married people with two children in 2012 will drop to around $65,000 if we go over the cliff.
While this was going on, the liberal and conservative TV and radio talk-show pundits, with few exceptions, were promoting the idea of going over the cliff as a good idea. “What’s the worst that can happen?”
Meanwhile, we hear from Washington insiders that some members of both parties privately want to go over the cliff, with each side convinced it would somehow benefit their party.
Few seem to understand the 2012 tax implications, thinking that we can go over the cliff and fix it later. And it would fix the 2013 problems, but not this AMT fiasco.
A CBS report indicated that people with incomes of $45,000 filing as individuals may pay as much as $4,000 more in taxes than last year. And H&R Block /quotes/zigman/219890/quotes/nls/hrb HRB -1.25% warns its clients that if they had been anticipating a $1,500 refund to instead expect to pay an additional $1,500 — or more. See blog post on fiscal-cliff implications on the H&R Block website.
The problem with all this is that nobody seems to be even expecting it, much less planning for it. This means all hell may break loose in the economy when the tax implications hit.
If I were in equities, I’d want to be out during the April tax season, until after we see what happens.
This entire fiscal-cliff debacle is being poorly handled by both political parties, who appear to care more about gamesmanship than fixing a problem that should have been fixed months ago.