The Alternative Minimum Tax

• What is the AMT?
• Why is the AMT an issue today?
• Where things stand on the Hill
• Information & resources

What is the AMT?

The Alternative Minimum Tax (AMT) is a parallel system to the regular income tax. It was created in 1969 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, unlike the regular income tax the AMT is not indexed for inflation. Second, tax cuts enacted since 2001 have substantially lowered taxpayers’ regular tax bills without changing the AMT rules. Thus, more and more middle-income taxpayers become subject to the AMT.

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 2009, households with adjusted gross incomes over $500,000 will pay 48 percent of AMT taxes. Households with incomes below $100,000 paid will pay one half 1 percent of AMT taxes in 2009.
• By 2011, if Congress does nothing more about the AMT, households with incomes over $500,000 will pay only 22.8 percent of AMT taxes. Households with incomes below $100,000 will pay 16.3 percent.

In 2001, Congress enacted the first of a series of “patches” that temporarily increased the AMT exemption level and prevented the number of taxpayers subject to the AMT from growing as rapidly as it otherwise would have. But as the potential impact of the AMT has grown, so has the cost of the annual patch.

Where things stand on the Hill

Congress enacted an AMT patch for 2009 as part of the American Recovery and Reinvestment Act (H.R. 1) signed into law on February 17, 2009. The patch increased the AMT exemption amount to $46,700 for individuals and $70,950 for couples. In 2008, the exemption levels were $46,200 and $69,950, respectively. Without further legislation, the exemption levels will revert to $33,750 for individuals and $45,000 for couples in 2010.

Some members of Congress have advocated for a complete repeal of the AMT, but that would cost nearly $2 trillion over the next 10 years (if the Bush tax cuts are extended; about $900 billion if they are not extended), and most of the benefits of repeal would go to the very wealthy.

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 have permanently repealed the AMT and replaced it with an income tax surcharge on very high-income households.

Senate Finance Committee Chairman Max Baucus (D-MT) introduced the Taxpayer Certainty and Relief Act (S. 722) this year. The bill would make numerous changes to the tax code. With respect to the AMT, it would make permanent the 2009 exemption amounts, indexed for inflation.

Information & Resources:

Distribution of AMT and Regular Income Tax by Cash Income, Urban-Brookings Tax Policy Center (March 27, 2009).

AMT Participation Rate by Individual Characteristics, Urban-Brookings Tax Policy Center (March 27, 2009).

Aggregate AMT Projections and Recent History, Urban-Brookings Tax Policy Center (March 27, 2009).

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).

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).