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2010 Budget Tax Proposal

Tax Revenue Adjustments to Baseline

Rather than assume a baseline that projects future revenues that would accrue under current tax law, the budget assumes a baseline that permanently indexes the alternative minimum tax (AMT) for inflation, extends the 2001 and 2003 income tax cuts beyond their scheduled sunset in 2011, and permanently extends the estate tax with 2009 parameters. Those assumptions reduce tax revenues by more than $3.2 trillion over the next decade. Given that baseline, proposals that would reinstate portions of pre-2001 tax law show up as revenue raisers, even though they would occur as a matter of course if Congress did not act to prevent them.

Index 2009 parameters of the AMT to inflation
Since 2001, Congress has repeatedly increased the individual alternative minimum tax (AMT) exemption on a temporary basis to prevent too many taxpayers from being subject to the tax. The temporary legislation has also allowed taxpayers subject to the AMT to use personal nonrefundable tax credits, including credits for childcare and higher education, which the AMT normally disallows. Absent these stopgap measures, sometimes called "the patch," the AMT exemption would stay at the nominal levels established in 1993, and the AMT would affect almost a third of all taxpayers. 

The stimulus bill (“American Recovery and Reinvestment Act of 2009”) extended the patch through 2009, setting the exemption level at $46,700 for single and head of household filers, $70,950 for married people filing jointly and qualifying widows or widowers, and $35,475 for married people filing separately.  The AMT has two tax rates: 26 percent on the first $175,000 of income above the exemption and 28 percent on incomes above that amount. The AMT exemption phases out at a 25 percent rate between $112,500 and $299,300 for singles and heads of household, between $150,000 and $433,800 for married couples filing jointly, and between $75,000 and $216,900 for married couples filing separately. The phaseout creates effective AMT tax rates of 32.5 percent—125 percent of 26 percent—and 35 percent—125 percent of 28 percent for affected taxpayers.

The president proposes to make permanent the 2009 AMT parameters—exemptions, rate brackets, and phaseout thresholds—and index them for inflation. That would remove a significant source of uncertainty about taxation and prevent inflation from pushing large numbers of taxpayers onto the AMT in future years. Most of the benefits of the change would go to taxpayers with relatively high incomes: about three-fourths of the tax cut in 2012 would go to households with income over $100,000. Over half of taxpayers with income between $200,000 and $500,000 would see their tax bills drop by an average of nearly $1,700, raising their after-tax income by more than 0.8 percent.

Distribution tables
        Index 2009 parameters of the AMT to inflation
2012 versus current law by cash income
2012 versus current law by cash income percentiles

Additional Resources
Tax Topics: Individual Alternative Minimum Tax
Stimulus Act Report Card: Extend the Alternative Minimum Tax Patch through 2009
Tax Policy Briefing Book: Alternative Minimum Tax
Description of Revenue Provisions Contained in the President’s Fiscal Year 2010 Budget Proposal; Part One: Individual Income Tax and Estate and Gift Tax Provisions (JCS-2-09), Joint Committee on Taxation, September 2009, pp 2-7