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, for two reasons. First, the AMT is not indexed for inflation. Second, tax cuts enacted since 2001 reduced the regular tax liability for some taxpayers without adjusting the AMT, further increasing the number of people affected by the AMT. This has 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 2007, households with adjusted gross incomes over $500,000 paid 50 percent of AMT taxes. Households with incomes below $100,000 paid less than 1 percent of AMT taxes in 2007.
- By 2010, if Congress does nothing about the AMT, households with incomes over $500,000 will pay only 18 percent of AMT taxes. Households with incomes below $100,000 will pay 8 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, could cost $960 billion over the next decade, and as much as $1.8 trillion if the 2001 to 2003 tax cuts are extended. This is more than the cost of repealing the estate tax.
So far, Congress has continued to pass temporary, one-year AMT patches without enacting real, long-term reforms. On December 26, 2007, President Bush signed into law the Tax Increase Prevention Act of 2007 (H.R. 3996), which increased the AMT exemption amount and increased the AMT limit for nonrefundable personal credits for 2007. The final bill was not paid for; although the House had twice passed bills that offset the cost of the AMT patch for 2007, those were blocked in the Senate, and the House eventually agreed to an unpaid-for bill that President Bush would sign. A similar patch for 2008 will cost about $50.6 billion.
Even temporary AMT patches should offset lost revenue through closing tax loopholes exploited by the very wealthy. On June 25, 2008, the House passed an AMT patch bill for 2008 (H.R. 6275) that is fully paid for by closing the “carried interest” loophole that allows private equity and hedge fund managers to treat earned income as capital gains for tax purposes, limiting various tax preferences for oil and gas producers, limiting the use of tax treaties by foreign companies, and placing additional reporting requirements on payment card transactions.
Long-term AMT reform can be accomplished to ensure that middle-income households are exempted from the tax while the very wealthy pay their fair share. For example, in October 2007, Ways and Means Committee Chairman Charles Rangel (D-NY) introduced a broad tax reform bill (H.R. 3970) that would permanently repeal the AMT. At the same time, the bill would improve tax credits for working families, reform the corporate tax, and tax the earnings of private equity and hedge fund managers fairly. Nearly 90 million households would receive a tax cut. Although the bill will likely not be acted on this year, it lays out an ambitious agenda for the future.
Information & Resources:
House Proposal to Pay for AMT Relief by Closing Loopholes Would Make the Tax Code Fairer and Avoid Increasing the Deficit, Citizens for Tax Justice (June 20, 2008).
The Individual Alternative Minimum Tax: 12 Facts and Projections, Urban-Brookings Tax Policy Center (June 30, 2008).
The Individual Alternative Minimum Tax: Historical Data and Projections, Urban-Brookings Tax Policy Center (Updated June 2008).
Fact Sheet: The "Mother of All Distortions": Attacks on Rangel AMT Plan Not Based On Reality, Center on Budget and Policy Priorities (February 12, 2008).
The Rangel AMT Proposal Versus Unpaid-For Repeal of the AMT: Which Is Better Tax Reform?, Center on Budget and Policy Priorities (February 13, 2008).
Cost Estimate for H.R. 3996, Tax Increase Prevention Act of 2007, as signed by the President on December 26, 2007, Congressional Budget Office (January 15, 2008).