Alternative Minimum Tax: What is the effect of the 2001-06 tax cuts on the AMT?
The Administration’s extension in 2010 of the various tax cuts and stimulus measures enacted between 2001 and 2010 reduced regular income tax liability for the years 2011-12 but lowered alternative minimum tax (AMT) liability only for 2011. Since taxpayers must pay the higher of the two, the reduction in regular tax liability without a corresponding reduction in AMT liability in 2012 will lead to a dramatic increase in the number of taxpayers affected by the AMT. In 2012, assuming no change in current law, an estimated 31 million taxpayers will be subject to the AMT, two-thirds more than the estimated 19 million who would have been affected had Congress not enacted the tax cuts.
- Because taxpayers must pay the higher of their regular individual income tax or the AMT, the AMT acts as a floor on their individual income tax liability. The AMT thus affects more and more taxpayers as regular tax liability falls—assuming AMT liability doesn’t change.
- The tax cuts and stimulus measures enacted between 2001 and 2010 reduced regular income tax liabilities through 2012 but changed the AMT only through 2011. A temporary patch enacted in 2010 extended AMT relief for two years—2010 and 2011—boosting the 2011 AMT exemption from $45,000 to $74,450 for married couples and from $33,750 to $48,450 for singles. Temporary legislation also allowed the use of certain nonrefundable credits, such as the education credits and the child and dependent care credit, against both the regular tax and the AMT. Both the increase in the exemption and the allowance of these credits expire at the end of 2011, but Congress may renew both provisions as it has done repeatedly in recent years.
- Absent further AMT relief, the number of AMT taxpayers will explode in 2012 relative to what it would have been without all the tax legislation of the past decade. The AMT will affect 31 million taxpayers in 2012—more than a third of all taxpayers. If Congress extends the patch again, the higher AMT exemption and the credit provision would reduce the number of taxpayers subject to the AMT by 85 percent to fewer than 5 million.
- The tax cuts also raised the amount of revenue the AMT will collect. In 2012, again assuming no reform, the AMT will generate an estimated $132 billion, or 11 percent of all individual income tax revenue. Under pre-2001 law, the AMT would have collected less than $70 billion, under 5 percent of all individual income tax revenue.
- If Congress makes the tax cuts permanent and doesn’t change the AMT, 67 million taxpayers will be on the AMT by 2022, compared with 55 million if Congress lets the cuts expire.
- Even if Congress allows all the temporary provisions to expire as scheduled, the number of taxpayers subject to the AMT will continue to grow, primarily because the AMT is not indexed for inflation while the regular income tax is. If a household’s income just keeps pace with inflation each year, its regular income tax remains constant (in real terms) but its AMT liability rises. Thus inflation pushes more and more households onto the AMT over time.