Key Elements of the U.S. Tax System

axpayers pay the higher of either their tax calculated under regular income tax rules or their tax calculated under the alternative minimum tax (AMT) rules. Because the 39.6 percent top rate under the regular income tax is higher than the 28 percent top statutory AMT rate, households with very high incomes who do not attempt to shelter much income typically pay based on the regular income tax system. Households that are not at the very top but still have relatively high incomes face somewhat lower statutory tax rates under the regular tax and are therefore more likely to pay the AMT.

In 2017, 29.4 percent of households with “expanded cash income” (which is a broad measure of income) between $200,000 and $500,000 will be affected by the AMT (table 1). That number rises to 62.9 percent for those with incomes between $500,000 and $1 million. In contrast, only 19.9 percent of households with incomes greater than $1 million will be on the AMT. 

Who Pays?

The regular income tax allows a personal exemption of $4,050 (in 2017, indexed for inflation) for each family member. The AMT exemption varies by filing status but does not increase with family size. Thus, in 2017 families with two children are nearly three times more likely to pay the AMT than those without children (6.5 percent versus 2.4 percent). Families with three or more children (9.5 percent) are roughly four times as likely to pay the AMT as those without children (table 2).

Under the regular income tax, many married couples receive a “marriage bonus” because they pay less tax than they would if they were single. This is not true under the AMT. AMT tax brackets are identical for married and single taxpayers, and the AMT exemption for married couples is only about one and a half times as large as the exemption for singles. In contrast, the standard deduction for married couples under the regular income tax is twice that for singles, and the 10 and 15 percent 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 incomes than single individuals, make married couples more than six times as likely as singles to pay the AMT.

Taxpayers can deduct state and local taxes under the regular income tax but not the AMT. Thus, in 2017 taxpayers in high-tax states are more than twice as likely to be on the AMT as those in low-tax states.