Alternative Minimum Tax: What is the effect of the AMT on the 2001-06 tax cuts?
The tax cuts and stimulus measures enacted between 2001 and 2010 did not permanently reform the alternative minimum tax (AMT). As a result, unless Congress extends the temporary AMT fixes that accompanied those cuts, the AMT will claw back much of the individual income tax reduction that taxpayers would have received in a world without the AMT. In fact, 3 percent of all taxpayers will receive no benefit from the tax cuts in 2012 because of the AMT and millions more will find their tax cuts reduced. The clawback also makes the budget impact of the large promised cuts in the regular income tax appear smaller than it otherwise would be, because many people will not actually receive them.
- Taxpayers who are potentially subject to the AMT must calculate their tax liability twice: once under the rules of the regular tax system and once under the rules of the AMT. They must then pay whichever amount is higher. Thus the AMT acts as a floor on individual income tax liability: a taxpayer cannot pay less than the amount calculated under the AMT.
- As an example, suppose that prior to all the tax cuts, a household’s tax calculated under the regular income tax rules was $5,000 and its tax calculated under the AMT was $4,000. That household would have paid the regular tax liability of $5,000, the larger of the two. Now suppose the tax cuts reduce the household’s liability under the regular income tax rules to $3,000. Under those rules, the household would thus receive a $2,000 tax cut. But assuming no accompanying change in the AMT rules, the household would actually owe $4,000, the now larger AMT liability. Thus the AMT would take away half of household’s expected $2,000 tax cut.
- Taxpayers who were already paying the AMT under pre-2001 tax cut get no benefit at all from the 2001-2010 cuts in the regular income tax. Because their AMT liability is unchanged and thus remains the higher of the two, they continue to pay the AMT regardless of the change in regular tax liability. In 2012, over 3 percent of all tax units will face that situation and receive no tax cut because of the AMT.
- In 2012, the AMT will cause taxpayers to lose, on average, more than a quarter of their 2001-10 tax cuts. Taxpayers in the income ranges most affected by the AMT will lose substantially more: those with cash incomes between $100,000 and $200,000 will lose more than half of their tax cuts and those in the $200,000-$500,000 range will lose nearly three-fourths of their tax cuts.
- Because the top regular income tax rate of 35 percent is higher than the top statutory AMT rate of 28 percent, the AMT affects relatively few of the highest-income taxpayers.
As a result, the AMT claws back a smaller fraction of the tax cuts for those at the very top. Thus in 2012, taxpayers with at least $1 million of cash income will lose only 5 percent of the tax cuts they would have received without the AMT.
About 25 percent of taxpayers in the $200,000-$500,000 cash income range will receive no tax cut because of the AMT, compared with only 2 percent of those making $1 million or more.
If the 2001-10 tax legislation had provided rate cuts in the AMT similar to those in the regular income tax, it would have raised the revenue cost over the 2001-10 period by more than $240 billion, or about 9 percent of the cost of the tax cuts and stimulus provisions as enacted in this period.