Alternative Minimum Tax: What has been the effect of annual "patches?"
Since 2001, Congress has repeatedly increased the individual alternative minimum tax (AMT) exemption level on a temporary basis to prevent too many taxpayers from being subject to the tax. The temporary legislation also allows taxpayers subject to the AMT to use personal nonrefundable tax credits, including credits for child care and higher education, which the AMT normally disallows. Absent these stopgap measures, sometimes called "the patch," the AMT exemption would be set at levels established in 1993, and almost a third of all taxpayers would be affected by the AMT.
- The most recent patch expires at the end of 2011 and applies to taxes due on income earned in that year. Unless Congress extends the higher exemption, about 31 million taxpayers will owe AMT in 2012.
- The main attraction of the patch is that it appears to reduce tax revenue by far less than a permanent fix, but that occurs only because it affects budgetary costs for only a year or two in the customary ten-year budget window. For example, a one-year patch enacted for 2012 would reduce federal tax revenue by about $85 billion, compared with a $1.1 trillion price tag for permanently indexing the AMT exemption for inflation, and a $1.4 trillion cost of full repeal over the 2012-2022 period.
- The patch creates unnecessary uncertainty for taxpayers. For one thing, it makes it difficult to plan estimated tax payments. Had Congress not enacted the most recent patch, for example, married taxpayers with cash income between $200,000 and $500,000 might have owed as much as $5,800 in additional taxes, along with possible penalties for underpayment of estimated taxes. Uncertainty surrounding the patch also makes it unclear whether some taxpayers will benefit from nonrefundable tax credits, such as the hybrid vehicles tax credit.
- Enacting the patch late in the year, as happened in 2007 and 2010, creates processing problems for the Internal Revenue Service (IRS). After Congress enacted the AMT patch on December 19, 2007, the IRS had to reprogram its five forms affecting AMT returns. That required taxpayers potentially affected by the AMT patch to delay filing their returns till February 11, 2008. In 2010, the IRS followed a request from the chairs and ranking members of the Senate Finance Committee and the House Committee on Ways and Means and programmed higher AMT exemptions into its system prior to passage of actual legislation in mid-December. While that prevented any delays in processing returns, taxpayers might have experienced delayed tax refunds if Congress had not patched the AMT as expected.
- Extending the higher exemption year by year masks the long-term budget problems, because conventional scoring rules assume that the patch will be allowed to expire as scheduled. It also makes income tax rate cuts appear much less expensive than they actually turn out to be, because, without the patch, the AMT would take back all or part of the rate cuts enacted in 2001 for many taxpayers.
For the latest on the AMT, see www.taxpolicycenter.org/taxtopics/AMT.cfm