The voices of Tax Policy Center's researchers and staff
Like many of the five million tax filers who must pay the Alternative Minimum Tax (AMT), I am trapped. I wrote a big check to the IRS last month, but that’s not what bothers me. I don’t like having to calculate my taxes twice with two sets of complex tax rules. And no matter what I do, short of getting a huge raise or quitting my job, I’m stuck on the AMT.
And according to newly updated Tax Policy Center estimates, I’ll have more company in the future. By 2027, 5.6 million taxpayers will pay almost $60 billion of AMT, up from $35 billion today.
As TPC has explained, the AMT was created nearly 50 years ago after Congress learned that 155 Americans with income over $200,000 paid no federal income tax in 1967. In 1970, fewer than 50,000 filers paid barely $100 million in AMT. For 2016, nearly five million of us paid AMT averaging about $7,200, raising our effective tax rates by an average of 1.4 percentage points and boosting federal revenues by about 1 percent.
The AMT requires many taxpayers to calculate their income taxes twice, once under regular rules and again under the alternate system. The AMT disallows some deductions and exemptions, including the standard deduction, personal exemptions, and many itemized deductions, most notably for state and local taxes (SALT). It has its own exemption ($53,900 for single taxpayers and $83,800 for married couples in 2016), which phases out for high-income taxpayers. There are only two rates—26 percent and 28 percent-- and taxpayers pay the higher of the regular tax or the AMT.
The AMT primarily hits households with high but not the highest income. About two-thirds of AMT payers have income between $200,000 and $500,000, and another fifth make between $500,000 and $1 million. But less than 3 percent have incomes over $1 million.
Looked at another way, about 60 percent of households in the $500,000 - $1 million range owed AMT for 2016, compared to about 30 percent of those making $200,000 to $500,000, and just under 20 percent of those with income over $1 million.
The AMT was originally intended to prevent people from taking unfair advantage of tax preferences to avoid paying income tax. And the recent high-profile example of President Trump was held out by some as evidence. But in reality, the tax often fails to meet that goal. In 2013, about 12,000 households with income over $200,000 paid no federal income tax, despite the AMT.
Worse, many people who do not appear to be abusing the tax code still get hit by the alternative tax, often just because they have big families or pay a lot of state and local taxes. Those don’t seem to be egregious loopholes.
I am one of them. As empty-nesters, my wife and I take only our own exemptions and use only one other tax preference targeted by the AMT—the deduction of state and local taxes. We pay a lot of those taxes, yet even if we didn’t take the SALT deduction, we’d still be on the AMT. Our AMT bill would go down as our regular tax rises but our total tax liability wouldn’t change. We’re just stuck in an income range where the AMT is hard to avoid.
The AMT does serve a useful purpose: despite its confusing complexity, it serves as a brake on high-income tax cuts. When Congress enacted the 2001 tax cuts, it didn’t change the AMT commensurately. As a result, about a quarter of the reduction in regular income taxes was clawed back by the AMT.
My objection to the AMT is not that I pay too much tax but rather that it makes the income tax even more impenetrably complex. It’s hard enough for people to understand the regular tax without tacking on additional calculations. And taxpayers won’t trust a system they don't comprehend--or believe raises revenue in a fair way.
I won’t complain about having to pay my share of federal taxes. I just wish that Congress would reform the tax code so it’s more transparent and easier to understand.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
AP Photo/Marcio Jose Sanchez