Bank of America: Fiscal Cliff Crossed-Fingers Winner (Update 1)
Updated with market close information, stock ratios and an economic report.
The Dow Jones Industrial Average (^DJI) and the S&P 500 (SPX.X) were down slightly, while the NASDAQ Composite (^IXIC) pulled back 1%, as investors returned from the Christmas holiday, looking forward to the return of Congress on Thursday for more negotiations on a compromise bill to avert the fiscal cliff. President Obama cut his Hawaii vacation short in order to participate in what may turn out to be a pared-down bargain to hold the line on tax increases and spending cuts, while kicking discussions of entitlement cuts -- favored by the Republican leadership of the House of Representatives -- further down the road.
Part of the discussions will no doubt be the Alternative Minimum Tax, which was enacted during the 1960's in order to ensure that upper-income taxpayers with a large amount of deductions to their adjustable income pay a minimum in federal income taxes. The problem with the AMT is that it is not indexed to inflation. This requires Congress to pass a bill each year to "patch" the AMT in order to keep its reach from expanding to millions more taxpayers.
Congress and the president had plenty of time to do their annual work on the AMT, which never had anything to do with the Fiscal Cliff. Unfortunately, the procrastination in Washington has complicated not only the Fiscal Cliff -- created in compromise between President Obama and Congress in 2011, in order to force politicians to at least address the runaway federal deficit and national debt -- but the work of the Internal Revenue Service.
Since the IRS still doesn't know how the AMT will work for 2012, everyone's favorite federal agency will have little time to update its systems to address the AMT patch, or the expansion of the AMT if no patch is passed.
Acting IRS Commissioner Steven Miller sent a letter to Congress in November and another letter last Wednesday, saying that "the most recent AMT Patch, and the exemption amounts of $74,450 for joint filers and $48,450 for single taxpayers, expired at the end of 2011," and that without a new patch for 2012, "the current-law AMT exemption amounts are much lower: $45,000 for joint filers and $33,750 for single taxpayers."
"This means that 30 million additional taxpayers will become subject to the AMT on their 2012 income tax returns."
Writing for Real Money , Jim Cramer said that "we should be going down, not up," since the type of fiscal austerity that "falling off" the fiscal cliff would bring about, as not worked in Europe. The "most likely scenario" for the markets relative strength on Wednesday morning was that "the market likes the coming together that we will see after we go over the cliff with the Republicans fighting vigorously for tax cuts and winning," he said.