The Alternative Minimum Tax (AMT): Income Entry Points and "Take Back" Effects

The Alternative Minimum Tax (AMT):
Income Entry Points and “Take Back” Effects
Steven Maguire
Specialist in Public Finance
Government and Finance Division
Summary
The alternative minimum tax for individuals (AMT) was originally enacted to
ensure that high-income taxpayers paid a fair share of the federal income tax. However,
the recent reductions in regular income taxes coupled with the lack of indexation of the
AMT has greatly expanded the potential impact of this tax.
Temporary increases in the AMT exemption amounts expired at the end of 2007.
If this occurs, then the number of taxpayers subject to the AMT will jump from roughly
5 million in 2007 to 26 million in 2008. Taxpayers filing joint returns with no
dependents will be subject to the AMT starting at income levels of $74,660. Large
families will be subject to the AMT at income levels as low as $55,568.
In addition, for many taxpayers, the AMT will “take back” much of the reductions
in the regular income tax earlier this decade.
The estimated combined revenue loss from extending recent reductions in the
regular individual income tax and extending the higher AMT exemption amounts
(indexed for inflation) and allowing personal credits (the “patch”) would be significant.
These two policy options together along with increased debt service would reduce
federal tax revenues by more than $4.3 trillion between 2009 and 2018.
This report will be updated as legislative action warrants.
The alternative minimum tax for individuals (AMT) was originally designed to
prevent a small number of high-income taxpayers from escaping their “fair” share of
income taxes through the use of special preferences under the regular income tax.¹ In the
absence of legislative action, however, the number of taxpayers falling under the AMT
is going to increase dramatically over the next few years.

¹ For a detailed history and explanation of the AMT see CRS Report RL30149, The Alternative
Minimum Tax for Individuals, by Steven Maguire.

There are two main reasons for the increase in the number of taxpayers affected by
the AMT. First, tax reductions under the regular income tax have significantly narrowed
the differences between regular and AMT tax liabilities. These tax reductions in the
regular income tax occurred in the Economic Growth and Tax Relief Reconciliation Act
of 2001 (P.L. 107-16; EGTRRA), the Jobs and Growth Tax Relief Reconciliation Act of

2003 (P.L. 108-27; JGTRRA), and the Working Families Tax Relief Act of 2004 (P.L.

108-311; WFTRA). In addition to reducing taxes under the regular income tax, all of
these measures contained temporary increases in the AMT exemption designed to mitigate
the interaction between the reductions in the regular income tax and the AMT. The
temporary increases in the AMT exemptions, however, expired at the end of 2007.
Second, the regular income tax is indexed for inflation but the AMT is not. Over
time this has further reduced the differences between regular income tax liabilities and
AMT liabilities at any given nominal income level, differences that will continue to shrink
in the absence of AMT indexation.
The combination of these two factors — reductions in the regular income tax and the
lack of AMT indexation — means that, absent legislative changes, there will be a
significant growth in the number of taxpayers affected by the AMT.² It is estimated that
in 2007, about 5 million taxpayers will pay the AMT. If the temporary AMT exemption
increase is not extended beyond 2007, then about 26 million taxpayers will pay the AMT
in 2008. By 2017, if the tax cuts are extended, then the number of taxpayers paying the
AMT will increase to almost 36 million.³
Calculating AMT Liabilities
Under current law, to calculate AMT tax liability an individual first adds back
various tax items (called adjustments and preferences) to his regular taxable income. The
three major preference items added back to the AMT tax base are state and local tax
deductions, personal exemptions, and miscellaneous itemized deductions. These three
items account for over 96% of the total AMT preference items and adjustments that are
added back to regular taxable income for AMT purposes. Other items subject to tax
under the AMT include net operating losses, passive activity losses, incentive stock
options, and private activity bond interest.
This grossed up income becomes the tax base for the AMT. An exemption of
$66,250 for joint returns and $44,350 for single and head of household returns is
subtracted to obtain AMT taxable income for 2007. (These exemption levels are
temporary and are scheduled to revert in 2008 to their prior law levels of $45,000 for joint
returns and $35,750 for unmarried taxpayers.) The basic AMT exemption is phased out

² In addition, even though a taxpayer may not actually pay the AMT, it can still affect his tax
liability because certain non-refundable tax credits under the regular income tax are limited to
the excess of regular income tax liability over AMT liability. Temporary provisions which allow
taxpayers to use personal tax credits against both their regular and AMT liabilities expired at the
end of 2007. The child tax credit, the adoption tax credit, and the IRA contribution credit,
however, can all be applied against both the regular income tax and the AMT.
³ U.S. Congress, Joint Committee on Taxation, “Present Law and Background Relating to the
Alternative Minimum Tax,” JCX-38-07, June 25, 2007.

for taxpayers with high levels of AMT income. A two-tiered rate structure of 26% and
28% is assessed against AMT taxable income. The tax is 26% of AMT taxable income
up to $175,000 and 28% of AMT taxable income in excess of $175,000. The taxpayer
compares his AMT tax liability to his regular tax liability and pays the greater of the two.
Structural Overlap of the AMT with the Regular Income Tax
The reductions in the regular income tax and the lack of AMT indexation means that
in 2008 when the temporary increases in the AMT exemption expire there will be a
structural overlap between the AMT and the regular income tax. Over certain income
intervals, individuals will be subject to the AMT rather than the regular income tax.
Table 1 below shows the income levels at which joint returns with up to six children
would be subject to the AMT rather than the regular income tax in 2008. That is, it shows
the income intervals at which the AMT for these returns would be higher than their
regular income taxes and, and as a result, they would pay the AMT. The table assumes
that families use the standard deduction under the regular income tax and have no AMT⁴
preferences or adjustments other than their personal exemptions.
For example, in 2008 taxpayers filing joint returns with two children and income
between $65,114 and $457,239 will be subject to the AMT rather than the regular income
tax. For larger families, the AMT will overlap the regular income tax at lower incomes
and extend through higher incomes. For families with four children, the AMT is greater
than the regular income tax for joint returns with incomes between $55,568 and $480,572.
Table 1. 2008 Income Boundaries Where Joint Taxpayers Will Be
Subject to the AMT Rather than the Regular Income Tax
Number of Children
None1234
Entry point^$74,660^$69,887^$65,114^$60,341^$55,568
Exit point^$433,905^$445,575^$457,239^$468,905^$480,572
^Note:^C^a^lcu^l^{ated by}^C^R^{S. A}^s^s^u^m^e^sⁱⁿ^com^e^is^{all earn}^e^{d in}^com^e^{, th}^{e u}^s^{e of}^th^{e s}^t^an^{dard dedu}^ction^,^an^d
^th^{at th}^{e f}^a^m^{ilies h}^a^v^eⁿ^o^A^M^T^p^r^ef^er^en^{ce item}^s^o^t^h^e^r^th^an^th^eir^p^e^r^s^oⁿ^{al ex}^em^p^tioⁿ^s^.
“Take Back” Effect of the AMT
Table 2 shows the “take back” effect of the AMT in 2008. That is, the table shows
how much of the tax cuts will be lost if the AMT exemption amount for joint returns
reverts back to $45,000 in 2008. For example, consider the case of a joint return with two
children and an income of $75,000. If the tax cuts had not been enacted, then their regular
income tax liability in 2008 would have been $6,515. Their AMT tax liability in 2008
under current law will be $5,800. Since their AMT would have been less than their

⁴ Families with large amounts of AMT preference items in addition to their personal exemptions
might face income entry points for the AMT that are lower than those shown in Table 1.

regular income tax liability (absent the tax cuts), they would pay their regular income tax
of $6,515.
However, under current law (which includes the effects of the tax cuts) this family’s
regular income tax liability in 2008 will be $4,713. This represents a $1,802 reduction
in their regular income tax compared to what it would have been under pre-2001 tax law.
Their AMT liability in 2008 will still be $5,800 — permanent AMT modifications were
not included in the tax cut. Since their AMT liability is higher than their regular income
tax in 2008, they would pay the AMT of $5,800. In essence, the AMT takes back $1,087
of the tax reductions (the difference between the family’s regular income tax liability of
$4,713, and their $5,800 AMT liability). So, 60% of the reduction in their regular income
taxes will be lost to the AMT ($1,087 in realized tax reductions divided by $2,045 in
potential tax reductions).
Table 2. “Take Back” Effect of AMT in 2008 on Recent Tax Cuts for
Married Couples with Two Children Under 17 Years Old
2008Current Law for 2008 AMT TakePercentage
2008Income TaxesBack ofof Tax Cut
IncomeAssuming Pre-Enacted TaxLost toRegular
Levels2001 Tax Law CutsAMTIncome TaxAMT
(No Tax Cut)(w/ Tax Cut)
$75,000 $6,515 $4,713 $5,800 $1,087 60.3%
$90,000 $8,801 $6,963 $9,700 $2,737 148.9%
$100,000 $11,601 $9,463 $12,300 $2,837 132.7%
$120,000 $17,701 $14,963 $18,000 $3,037 110.9%
$150,000 $26,601 $23,963 $27,300 $3,337 126.5%
$175,000 $33,601 $30,772 $35,425 $4,653 164.5%
$200,000 $41,153 $37,772 $43,550 $5,778 170.9%
^No^te:^C^a^lcu^l^{ated by}^C^R^S^{. A}^s^s^u^m^e^s^earn^e^{d in}^com^e^{, u}^s^{e of}^s^t^an^{dard dedu}^ction^,^an^{d th}^{at th}^{e on}^ly^pers^on^al
^t^a^x^credi^t^s^cl^ai^m^e^d^are^t^h^e^chⁱ^l^d^t^a^x^credi^t^(w^hⁱ^chⁱ^s^ph^as^{ed ou}^t^begⁱⁿⁿⁱⁿ^g^atⁱⁿ^com^e^g^r^eat^{er t}^h^an^$110,000).
In dollar terms, the take back increases as income increases through. In these
examples the family hardest hit by the AMT has $200,000 of income. Under pre-tax-cut
law, their regular income tax liability in 2008 would have been $41,153. With the tax
cuts, their regular income tax would fall to $37,772, a reduction of $3,381. The AMT
liability, however, would be $43,550, effectively taking back the entire tax cut plus an
additional $2,397. Without a patch or repeal of the AMT, a family of four with $200,000
of income will actually pay more in taxes in 2008 than if the tax cuts were never
implemented. In fact, CRS calculates that most families of four filing a joint return with
income greater than $81,500 would pay more in 2008 — because of the AMT — than if
the tax cuts were never implemented.

Revenue Costs of Fixing the AMT
The revenue costs of fixing the AMT are substantial. It is estimated that the AMT
will raise almost $107 billion in revenue in FY2009.⁵ By 2018, it will bring in $130
billion in revenue. Outright repeal of the AMT, thus, would be expensive. Estimates
indicate that repeal of the AMT would reduce federal tax revenues by $759.2 billion from
FY2009 through FY2017, assuming the EGTRRA/JGTRRA tax cuts expire as scheduled
in 2010. If these tax cuts are extended, then the cost of AMT repeal could rise to well
over $1.4 trillion.⁶
Other less costly options include allowing state and local tax deductions against the
the AMT, and extending/indexing the recent increase in the AMT exemption. As shown
in Table 3, however, even these options are relatively expensive. For instance, allowing
state and local tax deductions against the AMT would cost $501 billion between FY2009
and FY2017. Extending and indexing the recent increase in the AMT exemption would
reduce federal revenues by $613.0 billion over the same period.
Table 3. Costs of Selected AMT Modifications, FY2009 to FY2017
(billions of dollars)
²⁰⁰⁹²⁰¹⁰²⁰¹¹²⁰¹²²⁰¹³²⁰¹⁴²⁰¹⁵²⁰¹⁶²⁰¹⁷^T^o^tal
^A^llow^{State an}^d
^L^o^{cal T}^a^x^Dedu^ction^a^62.1^70.2^58.5^34.8^40.9^47.4^54.3^62.2^70.6^501.0
^Ag^aⁱⁿ^s^t^AM^T
^Ex^ten^d^In^creas^ed
^A^M^T^Ex^em^p^tioⁿ^b^75.0^76.0^71.0^42.0^49.0^58.0^68.0^80.0^94.0^613.0
^w^ith^Iⁿ^d^e^x^a^tioⁿ
^R^e^{peal th}^{e A}^M^T^a^96.3^112.2^93.9^51.4^60.2^69.4^79.5^91.5^104.8^759.2
^A^s^s^u^m^e^s^2001/^{2003 t}^a^x^cu^t^s^ex^pi^{re at}^t^h^{e en}^{d of}^cal^en^{der y}^{ear 2010.}
^a.^{U.S. Co}ⁿ^g^r^{ess, J}^oⁱⁿ^{t Co}^m^m^{ittee o}ⁿ^T^a^x^a^tioⁿ^,^“^P^r^e^seⁿ^t^L^a^w^an^d^B^ack^g^r^o^uⁿ^d^Relatin^g^to^th^{e A}^lterⁿ^ativ^e
^Miⁿⁱ^m^u^m^T^a^x^,^{” JC}^X^-^38-^{07, Ju}ⁿ^e^{25, 2007.}
^{b. C}^oⁿ^g^r^es^sⁱ^on^{al B}^u^dg^et^Of^fⁱ^ce,^T^h^{e Budget}^{and Econom}ⁱ^c^O^u^t^l^{ook: Fi}^s^c^al^Y^e^ar^s^{2008 t}^o^2018,^Jan^.^2008.
^T^h^{e los}^s^es^tim^{ate does}ⁿ^o^{t in}^clu^d^{e th}^{e ex}^{pected h}ⁱ^g^h^e^r^cos^t^of^debt^s^e^rv^{ice an}^{d as}^s^u^m^e^s^th^{e in}^creas^ed
^ex^em^ptⁱ^o^{n l}^e^v^e^l^s^s^e^tⁱⁿ^{2007 i}ⁿ^creas^{e w}ⁱ^t^hⁱⁿ^f^l^atⁱ^oⁿ^.^T^h^{e i}ⁿ^cl^u^sⁱ^oⁿ^of^t^h^{e debt}^s^e^rvⁱ^{ce w}^o^u^l^{d add}
^$¹⁸⁹^billion^to^th^e^r^e^v^eⁿ^u^e^l^o^s^s^.^Th^e^C^B^O^e^s^tⁱ^m^a^t^e^s^t^h^a^tⁱⁿ^{2018, th}^{e prov}^is^ion^w^{ill cos}^t^an^oth^e^r
^{$110 billion}^(w^ith^{$40 billion}ⁱⁿ^a^ddition^a^{l in}^teres^t^ex^pen^s^e).
If the recent reductions in the regular income tax are extended beyond their
scheduled sunset date of December 31, 2010, then the costs of each of the three AMT
modifications shown in the table above would grow considerably. For instance, CBO
estimated that if the tax cuts are extended, then the cost of extending and indexing the
increased AMT exemption combined with allowing personal tax credits against the AMT

⁵ Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018,
January 2008.
⁶ Urban-Brookings Tax Policy Center. The Individual Alternative Minimum Tax: Historical Data
and Projections, November 2006.

would cost roughly $4.3 trillion over the FY2009 through FY2018 period (including the
increased debt service payments if the change is financed with debt).⁷

⁷ Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2008 to 2018,
January 2008.