How might we improve the AMT?
Congress could retarget the AMT to its original purpose or enact a major overhaul of the income tax system, eliminating the need for an alternative tax.
The Family Fix
The regular income tax allows a personal exemption of $4,000 (in 2015, indexed for inflation) for each family member. The individual alternative minimum tax (AMT) exemption varies by filing status but does not increase with family size. One possible reform option, a “family fix,” would allow dependent exemptions under the AMT. To mitigate marriage penalties, the proposal would also set the AMT exemption, 28 percent bracket threshold, and exemption phase-out threshold for married couples at twice the value for singles. This option would cost $134.9 billion over 10 years (table 1) and would reduce the number of AMT taxpayers by more than 3 million.
The Deduction Fix
Another option, a “deduction fix,” would allow state and local taxes, miscellaneous expenses above the 2 percent of adjusted gross income floor, and the standard deduction to be allowable under the AMT. This reform option would cost $281 billion over 10 years (table 1) and would reduce the number of AMT taxpayers to fewer than 400,000 (figure 2).
Taxing Capital Gains
Under current law, capital gains and qualified dividends generally receive the same preferential treatment under the AMT and the regular income tax. A third option would tax capital gains and qualified dividends at the same rate as ordinary income under the AMT. This option would generate $235 billion over 10 years (table 1) and would increase the number of AMT taxpayers by about 1 million annually (figure 2).
A major AMT overhaul combining all three of the above options would cost $166 billion over 10 years (figure 1), and would decrease the number of AMT taxpayers to about 500,000 (figure 2).
An alternative to this sort of incremental reform would be to combine the AMT’s repeal with a major reform of the individual income tax that would prevent the sheltering behavior that the minimum tax was originally designed to prevent. Standalone repeal of the AMT would cost $316 billion over the next 10 years (table 1).
Urban-Brookings Tax Policy Center. “TPC Microsimulation Model, version 0515-1.”
Burman, Leonard E., and David Weiner. 2005. ”Suppose they took the AM out of the AMT?” Washington, DC: Urban-Brookings Tax Policy Center.
Burman, Leonard E., William G. Gale, Greg Leiserson, and Jeffrey Rohaly. 2007. “Options to Fix the AMT.” Washington, DC: Urban-Brookings Tax Policy Center.