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?
Each year, the AMT potentially affects 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
Congress enacted an AMT “patch” for 2008 as part of the Emergency Economic Stabilization Act of 2008 (HR 1424), signed into law on October 3, 2008. The patch increased the AMT exemption amount to $46,200 for individuals and $69,950 for families. In 2007, the exemption levels were $44,350 and $66,250, respectively.
Long-term AMT reform could 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 and replace it with an income tax surcharge on very high-income households. 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. The bill lays out an ambitious agenda for the future.
Information & Resources:
How to Win Votes for the Bailout? Increase the Deficit by another $110 Billion with New Tax Cuts, Citizens for Tax Justice (October 6, 2008).
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).