The Alternative Minimum Tax (AMT)
- What is the AMT?
- Why is the AMT an issue today?
- Where things stand on the Hill
- Information & resources
The Alternative Minimum Tax (AMT) is a parallel system to the regular income tax. It was created to ensure that high-income households pay a minimum amount of income tax. Taxpayers who are subject to the AMT calculate both their regular income tax liability and their liability under the AMT, and pay whichever is larger.
Why is the AMT an issue today?
The AMT will affect tens of millions of additional taxpayers unless Congress acts. There are two reasons the impact of the AMT is growing. First, it is not indexed for inflation. Second, tax cuts enacted since 2001 reduced the regular tax liability for some taxpayers without adjusting the AMT. This allowed the Administration and Congress to disguise the true cost of the tax cuts since 2001.
A growing number of the taxpayers paying the AMT will be middle- and upper-middle-income people, especially married couples, families with children, and taxpayers in high-tax states. And, while the vast majority of AMT revenue will continue to come from households with incomes in the top 20 percent, the highest-income households will pay a smaller percentage of AMT taxes.
- In 2006, households with adjusted gross incomes over $500,000 paid nearly half of AMT taxes. Households with incomes below $100,000 paid just 1 percent of AMT taxes in 2006.
- By 2010, if Congress does nothing about the AMT, households with incomes over $500,000 will pay about 16 percent of AMT taxes. Households with incomes below $100,000 will pay 11 percent.
Where things stand on the Hill
There is bipartisan agreement in Congress that something should be done about the AMT, and quickly, but not about what should be done and how it should be financed. Reform of the AMT has to be done right, with reforms that benefit lower-income households and are fully and fairly paid for. Simply repealing the AMT, as some have proposed, would cost at least $800 billion over the next decade, and as much as $1.5 trillion if the 2001 to 2006 tax cuts are extended. This is more than the cost of repealing the estate tax. Even a one-year adjustment to the AMT, of the type Congress has previously enacted, would cost about $50 billion in 2007, draining revenue that is needed to improve health care, education, and other vital services. Fortunately, there are several options for reforming the AMT that would exempt middle-income households from the AMT and recover lost revenues by ensuring that the very wealthy pay their fair share.
On October 25, Ways and Means Committee Chairman Rangel (D-NY) introduced a broad tax reform bill (H.R. 3970). The bill would permanently repeal the AMT. At the same time, the bill would improve tax credits for working families, reform corporate taxation, and tax private equity and hedge fund managers fairly. The $1.3 trillion 10-year cost of this ambitious tax package is fully paid for, as tax cuts are offset by revenue raisers elsewhere in the tax system in a way that makes the system more progressive. Most likely, the bill will not be acted upon by Congress this year. However, the bill lays out an ambitious agenda for the future.
On November 9th, the House passed a bill (H.R. 3996) to temporarily patch the alternative minimum tax. The AMT patch bill includes some of the provisions proposed in Rangel's broad tax reform bill, including a temporary expansion of eligibility for the refundable child tax credit. The cost is fully paid for by closing tax loopholes, including the special tax treatment of private equity fund managers. The bill now will head to the Senate for consideration. President Bush has threatened to veto this important piece of legislation.
Information & Resources:
House AMT "Patch" Bill is Fiscally Responsible, Also Includes Child Tax Credit and Carried Interest Provisions That Would Make the Tax Code More Fair, Center on Budget and Policy Priorities (November 7, 2007)
Congressman Rangel's Tax Bill Would Make the Tax Code Simpler & Fairer - and the Changes Are All Paid For, Citizens for Tax Justice (November 2, 2007)
Distributional Effects of the Major Individual Income Tax Provisions of H.R. 3970, The Tax Reduction and Reform Act of 2007, Tax Policy Center (October 26, 2007)
The Alternative Minimum Tax: 11 Key Facts and Projections, Urban-Brookings Tax Policy Center (December 1, 2006).
Myths and Realities about the Alternative Minimum Tax, Center on Budget and Policy Priorities (February 14, 2007).
Options to Fix the AMT, Tax Policy Center (2007).
A Progressive Solution to the AMT Problem, Citizens for Tax Justice (2006).