Alternative Minimum Tax: Who pays the AMT?
Although most Alternative Minimum Tax (AMT) payers are moderately well off, the tax is steadily encroaching on families that most would consider to be solidly middle and upper-middle class. In 2012—and barring congressional action—45 percent of all tax filers with cash income between $75,000 and $100,000 will pay the AMT, up from 0.4 percent in 2011, when the temporary AMT fix or "patch" is in place. The AMT is also more likely to strike taxpayers with large families, who are married, or who live in high-tax states.
- Taxpayers effectively pay the higher of their tax calculated under regular income tax rules and their tax calculated under AMT rules. Since the 35 percent top rate under the regular income tax is higher than the 28 percent top statutory rate under the AMT, households with very high incomes who do not shelter a substantial portion of their income typically end up in the regular tax system. Households with lower but still moderately high incomes face lower regular tax rates and are thus more likely to owe AMT.
- In 2011, 42 percent of tax filers with cash income greater than $1 million will be affected by the AMT, compared with nearly 52 percent of those with cash income between $200,000 and $500,000. In 2012, the difference will increase if there is no AMT patch: only 51 percent of millionaires will pay the AMT, compared with 94 percent of those with income between $200,000 and $500,000.
- Legislation enacted by the Congress since 2000 temporarily increased the AMT exemption and allowed certain non-refundable credits to be used regardless of AMT liability. Those temporary features, referred to as the "patch," are currently scheduled to expire at the end of 2011. Barring Congressional action, AMT revenue will soar rapidly, particularly among upper-middle class families, who were helped the most by the temporarily higher exemption amount. In 2011, 0.4 percent of tax filers making between $75,000 and $100,000 (cash income) will pay the AMT; in 2012, 45 percent will. For those making between $100,000 and $200,000 (cash income), the percent of filers affected by the AMT will rise from 4 percent in 2011 to 81 percent in 2012. In contrast, not extending the patch would affect highest-income tax units less—42 percent of them would pay AMT in 2011 and 51 percent in 2012.
- The regular income tax allows a personal exemption for each family member but the AMT does not. In 2011, taxpayers with three or more children are three and a half times more likely to owe AMT than those with no children. Under current law, 44 percent of filers with three or more children will find themselves on the AMT in 2012, compared to only 17 percent for those without children.
- State and local taxes are deductible under the regular income tax but not the AMT. Thus in 2011, tax filers in high-tax states are much more likely to be on the AMT than those in low-tax states—5 percent of those in high-tax states will face the AMT compared with only 2 percent in low-tax states.
- The projected rapid growth of the AMT in coming years will sharply reduce the state-by-state differential in AMT exposure. With a patch in place in 2011, residents of high-tax states will be two and a half times more likely to fall prey to the AMT than those in low-tax states. With patch in 2012, they’ll only be a third more likely to pay AMT—27 percent vs. 20 percent.
- Most married couples receive a "marriage bonus," paying less regular income tax than they would if they were single. This is not true for the AMT.
- AMT brackets are identical for married and single taxpayers and the permanent AMT exemption is just one-third larger for couples than for singles. (The 2011 exemption for couples is about one and a half times that for singles.) In contrast, the standard deduction for couples under the regular income tax is twice that for singles and tax brackets for married couples are twice as wide as those for singles.
- AMT marriage penalties, combined with the fact that married couples often have children and tend to have higher household incomes than single individuals, result in married couples being nearly 6 times as likely to owe AMT as singles in 2011. In 2012, with expiration of the temporary AMT patch, married couples will be 12 times as likely to owe AMT as singles.
- Taxpayer characteristics can combine to create very high probabilities of being subject to the AMT. In 2011, the AMT affects less than 0.2 percent of married couples with two or more children and adjusted gross income between $75,000 and $100,000. Under current law, without an AMT patch, that share will rise to nearly 90 percent in 2012.