Alternative Minimum Tax: What is the AMT?
The individual alternative minimum tax (AMT) was originally enacted in 1969 to guarantee that high-income individuals paid at least a minimal amount of tax. After calculating their regular income tax, middle- and upper-income taxpayers must add a number of "preference items" to their taxable income, subtract a special AMT exemption, and recalculate their tax according to the AMT tax schedule. If the tax under that schedule is higher than the regular income tax, taxpayers pay the difference as AMT.
- In 2009, only about 3.8 million taxpayers will be subject to the AMT, but the number will explode to 29.9 million in 2010 unless the temporarily higher AMT exemption is extended (see table).
- The AMT has two tax rates: the first $175,000 of income above the exemption is taxed at a 26-percent rate, and incomes above that amount are taxed at 28 percent. The AMT exemption phases out beginning at $112,500 for singles and heads of household, $150,000 for married filing joint returns, and $75,000 for married returns filing separately. (Since the exemption phases out at a 25-percent rate, it creates effective AMT tax rates of 32.5 percent—125 percent of 26 percent—and 35 percent—125 percent of 28 percent.)
- State and local tax deductions and dependent exemptions are not allowed as deductions against the AMT. As figure 1 shows, these two adjustments account for most of the difference between the AMT and the regular income tax. In consequence, middle-income families with children who live in high-tax states are among those most likely to be subject to AMT.
- Because the AMT is not indexed for inflation, the number of AMT taxpayers grows every year. The 2001-06 tax cuts also doubled the size of the problem by cutting the regular income tax without a corresponding long-term fix to the AMT.
- The number of taxpayers subject to the AMT is scheduled to drop after the tax cuts expire, from 29.9 million in 2010 to 16.9 million in 2011. But the lack of inflation indexing in the AMT will continue to push that number inexorably back upward (see figure 2).
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- Repealing or fixing the AMT will be expensive. Under current law the AMT will increase tax revenue by more than $950 billion over the next ten years if the 2001-06 tax cuts expire as scheduled. If they are extended, repealing the AMT would cost over $1.9 trillion.
- By 2010 it would cost more to repeal the AMT than to repeal the regular income tax and leave the AMT in place.
