Index to Inflation the 2011 Parameters of the Individual Alternative Minimum Tax
Under current law, individual taxpayers may be subject to an alternative minimum tax if their tentative AMT liability exceeds their regular income tax liability. Tentative AMT liability is computed using a different rate schedule and different tax base than the regular income tax. The AMT owed is equal to the difference (if any) between tentative AMT liability and liability under the regular income tax.
Since 2001, Congress has repeatedly increased the individual AMT exemption on a temporary basis to prevent too many taxpayers from being subject to the tax. The temporary legislation has also allowed taxpayers to use personal nonrefundable tax credits, including credits for child care and higher education, to reduce tentative AMT liability. Absent these stopgap measures, sometimes called “the AMT patch,” the exemption would stay at the nominal levels established in 1993, personal nonrefundable credits would be limited or disallowed by the AMT, and the AMT would affect more than a third of all taxpayers in 2012.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the AMT patch through 2011, setting the AMT exemption levels in 2011 at $48,450 for single and head-of-household filers, $74,450 for married people filing jointly and qualifying widows or widowers, and $37,225 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 $117,650 and $311,450 for singles and heads of household, between $156,850 and $454,650 for married couples filing jointly, and between $78,425 and $227,325 for married couples filing separately. For affected taxpayers, the phaseout creates effective AMT tax rates of 32.5 percent—125 percent of 26 percent—and 35 percent—125 percent of 28 percent.
The "adjusted baseline" used in the president’s budget in place of current law assumes that the 2011 AMT parameters—exemptions, rate brackets, and phaseout thresholds—are permanently extended and indexed after 2011 for inflation. As a result of this baseline assumption about changes in the AMT, no revenue loss is shown in the president’s budget for an AMT patch. Relative to current law, however, the president’s proposed AMT patch would reduce revenues by $1.9 trillion between fiscal years 2013 and 2022.
The assumed changes to the AMT 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 benefits of the assumed changes would go to taxpayers with relatively high incomes because they incur the bulk of the additional tax liability levied by the AMT.
Tax Topics: Individual Alternative Minimum Tax.
Tax Policy Briefing Book: Alternative Minimum Tax.