The Individual Alternative Minimum Tax: Historical Data and Projections : Updated June 2008

The Individual Alternative Minimum Tax: Historical Data and ProjectionsGreg Leiserson, Jeff Rohaly

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Congress enacted a minimum tax in 1969 to guarantee that high-income individuals paid at least some tax. The AMT now threatens to grow from a footnote in the tax code to a major component affecting tens of millions of taxpayers. Although most lower- and middle-income taxpayers will remain unaffected by it, policymakers need to deal with the explosive growth of the AMT from an obscure tax affecting only 20,000 filers in 1970 to one affecting more than 33 million–a third of all taxpayers–by 2010. This document provides updated estimates of AMT participation, revenue, and distribution.

Congress originally enacted a minimum tax in 1969 to guarantee that high-income individuals paid at least a minimal amount of tax each year. Due to design flaws, however, the current alternative minimum tax (AMT) threatens to grow from a footnote in the tax code to a major component affecting tens of millions of taxpayers every year. One reason for the projected expansion of the AMT is that–unlike the regular income tax system–the AMT brackets and exemption are not indexed for inflation. In addition, since they reduce regular income taxes without a corresponding permanent fix to the AMT, the 2001-06 tax cuts exacerbate the AMT problem. Absent a change in law, more than 33 million taxpayers will be subject to the AMT by 2010. If Congress allows the tax cuts to expire at the end of 2010, the number of AMT taxpayers will fall dramatically in 2011, but will then trend back upward over time. By 2018, about 43 million taxpayers will be subject to the AMT under current law; that number will swell to almost 57 million if the tax cuts are extended. Although most lower- and middle-income taxpayers will remain unaffected by the tax, policymakers will need to deal with the explosive growth of the AMT from an obscure tax affecting only 20,000 filers in 1970 to one affecting more than a third of all taxpayers by 2010.

The Tax Policy Center (TPC) has written extensively about the AMT. This paper updates Rohaly and Leiserson (2006) with the TPC’s latest estimates of AMT participation, revenue, and the distribution of AMT liability. It starts with a brief overview of how the AMT works.

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Distribution of the 2001-2006 Tax Cuts : Updated Projections, July 2008

Distribution of the 2001-2006 Tax CutsGreg Leiserson, Jeff Rohaly

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Since 2001, Congress has passed a major tax bill almost every year. Most have reduced taxes significantly and, since they were not accompanied by spending cuts, the resulting deficits have increased the national debt. The tax cuts total almost $2.2 trillion over ten years, and that total may be vastly understated if some or all of the cuts are extended beyond their scheduled expiration date of 2010. In addition, the cuts exacerbated the growing problem of the alternative minimum tax (AMT). Barring legislative action, more than 33 million taxpayers will fall prey to the AMT in 2010.

Since 2001, Congress has passed a major tax bill almost every year. Most have reduced taxes significantly and, since they were not accompanied by spending cuts, the resulting deficits have increased the national debt. The largest revenue loss—$1.35 trillion over ten years—came from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) reduced revenues by another $350 billion (again over the subsequent decade). Subsequent legislation cut taxes further: $146 billion in 2004 (WFTRA), $142 billion in 2006 (TIPRA and PPA), $51 billion in 2007 (TIPA), and $125 billion in 2008 (ESA). The tax cuts total almost $2.2 trillion over ten years, and that total may be vastly understated if some or all of the cuts are extended beyond their scheduled expiration date of 2010. In addition, the cuts exacerbated the growing problem of the alternative minimum tax (AMT). Barring legislative action, more than 33 million taxpayers will fall prey to the AMT in 2010. It is highly unlikely that Congress will allow this to happen but simply extending the AMT “patch” through the end of 2010 would add another $207 billion to the cost of the tax cuts.

As Congress and the new President consider whether to extend some or all of the tax cuts, they should take into account the distribution of the tax cuts and how that distribution would change if the cuts were combined with measures to finance the resulting budget deficits. Although the long-term distributional effects of the 2001-06 tax cuts will depend on how they are ultimately paid for, the immediate benefits are skewed in favor of high-income taxpayers. In 2010, when the cuts are fully phased in, households in the middle fifth of the income distribution will receive an average tax reduction equal to 2.6 percent of after-tax income. Households in the top quintile—the 20 percent of the population with the highest incomes—will receive an average tax cut that is more than twice as large: 5.4 percent of income. Those in the bottom quintile will get an average cut equal to just 0.7 percent of income. Taxpayers at the very top of the income scale benefit the most. Those in the top one percent will receive a 7.3 percent average increase in after-tax income in 2010; those in the top one-tenth of one percent—the richest 1 in 1,000 taxpayers—will see their after-tax incomes rise an average of 8.2 percent.

Over the long-term, Congress must finance tax cuts through spending reductions, other tax increases, or a combination of the two. The financing approach chosen will significantly affect the ultimate distributional impact of the cuts. For example, if the revenue loss from the 2001–06 tax cuts and an accompanying fix for the AMT were offset by an additional tax levied in proportion to income, the combination would transfer after-tax income from the poorest four-fifths of households to the richest fifth. Only taxpayers in the top quintile of the income distribution would, on average, receive an increase in after-tax income. Average after-tax incomes would fall for households in the bottom eighty percent of the income distribution. Households in the lowest quintile would face an average tax increase equal to 2.6 percent of after-tax income whereas taxpayers in the top quintile would see a tax cut equal to 1.0 percent of income on average. Taxpayers in the top one percent would see an average tax reduction equivalent to 2.6 percent of income.

This paper summarizes the Tax Policy Center’s (TPC) latest estimates of the distributional impact of the 2001–06 tax cuts. We include the impact of all major individual income and estate tax provisions in the seven tax acts. Our distribution tables include individual and corporate income taxes, payroll taxes for Social Security and Medicare, and the estate tax. More information and additional detailed distribution tables can be found on our web site at http://www.taxpolicycenter.org.

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The Individual Alternative Minimum Tax: Historical Data and Projections, Updated October 2009

The Individual Alternative Minimum Tax: Historical Data and Projections, Updated October 2009Katherine Lim, Jeff Rohaly

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The alternative minimum tax (AMT), which originally targeted high-income taxpayers, requires annual legislation to prevent it from affecting millions of middle-income individuals each year. There are two primary reasons for the AMT's broadening impact; its parameters are not indexed for inflation and the 2001-2006 tax cuts reduced regular tax liability without changing AMT liability. In 2009, four million taxpayers will pay $33.5 billion in AMT, but without congressional action that number will rise to 27 million owing $102 billion in 2010. This paper describes the AMT and provides TPC's latest estimates of AMT coverage, revenue, and distribution.

Congress originally enacted a minimum tax in 1969 to guarantee that high-income individuals paid at least a minimal amount of tax each year. Due to design flaws, however, the current alternative minimum tax (AMT) requires annual congressional action to prevent it from affecting tens of millions of taxpayers each year. One reason for the expansion of the AMT is that-unlike the regular income tax system-the AMT brackets and exemption are not indexed for inflation. In addition, the tax cuts passed during the Bush administration exacerbate the AMT problem because they reduce regular income taxes without a corresponding permanent reduction in the AMT. Absent another temporary fix or other change in law, the tax cuts and lack of indexation will combine to push more than 27 million taxpayers onto the AMT in 2010. If Congress extends the Bush tax cuts, that number would swell to almost 52 million by 2020. Alternatively, if Congress allows all of the tax cuts to expire-which is highly unlikely-the number of AMT taxpayers would fall dramatically in 2011, but then trend back upward over time to hit more than 37 million taxpayers by 2020. Regardless of how Congress deals with the coming expiration of the Bush tax cuts, policymakers will also need to address the explosive growth of the AMT from an obscure tax affecting only 20,000 filers in 1970 to one that could affect nearly a third of all taxpayers in 2010.

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The Individual Alternative Minimum Tax (AMT): 12 Facts and Projections

The Individual Alternative Minimum Tax (AMT): 12 Facts and ProjectionsLeonard E. Burman, Julianna Koch, Greg Leiserson, Jeff Rohaly

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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Congress originally enacted a minimum tax in 1969 to guarantee that high-income individuals paid at least a minimal amount of tax. Under today's alternative minimum tax (AMT), middle- and upper-income taxpayers must add a number of "preference items" to their taxable income, subtract a special AMT exemption, and calculate their tax according to the AMT rules. If the tax under those rules turns out to be higher than their regular income tax, taxpayers pay the difference as AMT. Unless Congress acts, 26.8 million taxpayers will be affected by the AMT in 2008.

1. The AMT is exploding. Unless Congress acts, 26.8 million taxpayers will be affected by the AMT in 2008. In 2007, only 4.1 million taxpayers owed the tax because of the temporary AMT "patch," which has now expired. By comparison, in 1970, just 20,000 taxpayers were affected by the AMT. If the 2001-2006 tax cuts expire as scheduled at the end of 2010, 43 million taxpayers (almost two-fifths) will be hit by the AMT in 2018. If the tax cuts are extended, the number jumps to 57 million taxpayers (more than half) (tables T08-0094 and T08-0095).

2. The AMT is encroaching on the middle class. Although the AMT is highly progressive, the distribution of AMT liability will shift toward tax units with lower incomes. In 2007, tax units with $500,000 or more in income paid 50 percent of the tax; by 2010, they will pay only 18 percent. About 78 percent of households with incomes between $100,000 and $200,000 and 46 percent of those with incomes between $75,000 and $100,000 will pay the AMT by 2010 (compared with 3.6 percent and 0.6 percent in 2007) (tables T08-0096 and T08-0098).

3. The average AMT liability in 2007 was $6,577. Barring legislative action, the average is projected to decline this year to $3,264 as millions of middle-class families-that tend to owe a smaller amount of the tax-join the ranks of AMT taxpayers (table T08-0097).

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The Individual Alternative Minimum Tax (AMT): 11 Key Facts and Projections

Leonard E. Burman, Julianna Koch, Greg Leiserson

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in PDF Format.

The individual alternative minimum tax (AMT) was originally enacted in 1969 to guarantee that high-income individuals paid at least a minimal amount of tax. Middle- and upper-income taxpayers must add a number of so-called "preference items" to their taxable income, subtract a special AMT exemption, and calculate their tax according to the AMT tax schedule. If the tax under that schedule is higher than the regular income tax, taxpayers pay the difference as AMT.

1. AMT is exploding. In 2007, unless Congress acts, 23.4 million taxpayers will be affected by the AMT. In 2006, only 3.5 million taxpayers will owe the tax because of a temporarily higher exemption, which expires at the end of the year. By comparison, back in 1970, just 20,000 taxpayers were affected. If the 2001-2006 tax cuts expire as scheduled at the end of 2010, 39 million taxpayers (more than one-third) will be hit by the AMT in 2017. If the tax cuts are extended, the number jumps to 53 million taxpayers (49 percent). (Tables T06-0266 and T06-0267)

2. The AMT is encroaching on the middle class. Although the AMT is highly progressive, the distribution of AMT liability will shift toward tax units with lower incomes. In 2006, tax units with $500,000 or more in income will pay 47 percent of the tax; by 2010, they will pay only 16 percent. More than 80 percent of households with incomes between $100,000 and $200,000 and almost half of those with incomes between $75,000 and $100,000 will pay the AMT by 2010 (compared to 4.8 percent and 0.7 percent in 2006). (Tables T06-0268 and T06-0270)

3. The average AMT liability in 2006 is $6,782. Next year, the average is projected to decline to $2,985 as millions of middle class families join the ranks of AMT taxpayers. (Table T06-0269)

4. Two main factors behind the explosive growth in AMT: it is not indexed for inflation and the 2001-2006 tax cuts cut regular income tax without a permanent AMT fix. The AMT is not indexed for inflation and, therefore, it affects taxpayers with lower real incomes over time. The 2001-2006 tax cuts more than doubled the projected share of taxpayers who will face the AMT in 2010, from 16.0 percent to 33.6 percent. If the tax cuts had not been enacted and the AMT had been indexed for inflation along with the regular income tax in 1985, the number of AMT taxpayers would have remained between 300,000 and 400,000 through 2010. (Table T06-0266)

5. The AMT raises effective marginal tax rates. Marginal tax rates affect the incentive to work, save, and comply with the tax system. In 2006, 71 percent of AMT taxpayers face higher effective tax rates because of the AMT. In 2010, 89 percent will face higher rates. (Table T06-0271)

6. The AMT claws back the 2001 - 2006 tax cuts. In 2010, the AMT will take back almost 28 percent of the regular income tax cut that taxpayers otherwise would have received. Three percent of taxpayers will have their tax cuts completely eliminated by the AMT. This assumes that the AMT remains in full force. If it is scaled back or eliminated, it will turn out that the tax cuts are much more generous than originally estimated. (Table T06-0272)

7. The AMT is notoriously and pointlessly complex. The Internal Revenue Service and the Taxpayer Advocate have flagged the AMT as one of the most complicated tax provisions to comply with and administer. Most people required to fill out the AMT forms end up owing no additional taxes. The AMT also creates complicated interactions with the regular income tax.

8. Because the AMT disallows certain deductions and credits, it hits some taxpayers harder than others. Families with children are more likely to be subject to the AMT than those without children because the AMT eliminates dependent exemptions. Married couples will be more than 12 times as likely as singles to face the AMT in 2010. AMT participation for married families with two or more children and AGI between $75,000 and $100,000 will increase dramatically from less than 1 percent in 2006 to 89 percent in 2010. Since the state and local tax deduction is also disallowed by the AMT, residents in high tax states are currently almost three times more likely to face the AMT than those in low tax states. (Table T06-0268)

9. Repeal would be expensive and regressive. Repealing the AMT in 2007 would reduce revenues by $750 billion through 2016 if the 2001-2006 tax cuts expire as scheduled, and $1.3 trillion if they are extended. Almost 90 percent of the benefits of repeal would go to households with income above $100,000 in 2010. (Tables T06-0266 and T06-0270)

10. Simple reforms could spare most AMT taxpayers. Indexing the AMT for inflation and allowing personal credits against the AMT would reduce the number of AMT taxpayers in 2010 by over 85 percent.

11. Paying for reform is a key issue. Without revenue offsets, the reform above would reduce revenues by $520 billion over the next ten years (if the tax cuts sunset, $940 billion if they are extended). Rolling back the high-income rate cuts and the lower tax rates on dividends and capital gains enacted since 2001 would offset more than half of the revenue loss. If the tax cuts sunset, repealing the deduction for state and local taxes, as proposed by President Bush's tax reform panel, would more than offset the cost of reforming or repealing the AMT.

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The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, provides independent, timely, and accessible analysis of current and emerging tax policy issues for the public, journalists, policymakers, and academic researchers. For more tax facts, see http://www.taxpolicycenter.org/taxfacts.

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