The Potential Distributional Effects of the Alternative Minimum Tax

The Potential Distributional Effects of the
Alternative Minimum Tax
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The alternative minimum tax for individuals (AMT) was originally enacted to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 lack of indexation of the AMT coupled with the recent reductions in regular income
taxes has greatly expanded the potential impact of the AMT.
Temporary increases in the AMT exemption and provisions which allow taxpayers
to apply nonrefundable tax credits against their AMT liabilities expired at the end of

2007. Certain taxpayers will be more adversely affected than others. In general,

married taxpayers filing joint returns will be more adversely affected than single
taxpayers. In addition, taxpayers with large families will be more adversely affected
than taxpayers with small families.
In terms of income, the largest increase in taxpayers subject to the AMT will occur
over adjusted gross income (AGI) ranges of $100,000 to $500,000. Taxpayers with
AGIs between $50,000 and $100,000 will eventually be affected, with the negative
effects of the AMT growing substantially over time. Taxpayers with AGIs above
$500,000 will not be significantly affected by the expiration of the higher AMT
exemption.
This report will be updated as legislative action warrants or as new data become
available.
Background
The alternative minimum tax (AMT) for individuals was originally enacted to ensure
that all taxpayers, especially high-income taxpayers, paid at least a minimum amount of
federal taxes. However, absent legislative action, there will be a significant increase in
the number of middle- to upper-middle-income taxpayers affected by the AMT in the near
future. In 2006, about 4.2 million taxpayers were subject to the AMT, but by 2008, the

Joint Committee on Taxation (JCT) estimates that up to 25.7 million taxpayers could be
subject to the AMT.¹
There are two main reasons for the increase in the number of taxpayers affected by
the AMT. First, under the regular income tax, the tax brackets, standard deductions, and
personal exemptions are indexed for inflation. The AMT tax brackets and basic
exemptions are not indexed. Over time this has produced a reduction in 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
second reason is that the 2001 and 2003 reductions in the regular income tax further
narrowed the differences between regular and AMT tax liabilities. The combination of
these two factors means that, absent legislative changes, there will be significant growth
in the number of taxpayers affected by the AMT.²
The effects of the AMT have been mitigated through temporary increases in the basic
exemption for the AMT and temporary changes that allow taxpayers to use nonrefundable
personal tax credits to reduce their AMT liabilities. The most recent increase in the basic
AMT exemption occurred in December 2007 with the enactment of the Tax Increase
Prevention Act of 2007 (TIPA, P.L. 110-166). Under provisions of this act, the AMT
exemption for 2007 was set at $66,250 for joint returns and $44,350 for unmarried
taxpayers. In addition, this act allows taxpayers to temporarily use nonrefundable tax
credits to offset AMT liability. The Joint Committee on Taxation estimates that these two
changes will reduce federal revenues by almost $50.6 billion. In 2008, the basic AMT
exemption is scheduled to decrease to its prior law level of $45,000 for joint returns
($35,750 for unmarried taxpayers) and nonrefundable tax credits will not be allowed to
offset AMT liability.
Who Will be Subject to the AMT in the Future?
For 2008, the basic exemption for the AMT has reverted to its lower prior-law levels
and nonrefundable personal tax credits are not allowed against the AMT. As a result,
there will be a significant increase in the number of taxpayers subject to the AMT, and
there will also be a significant change in the types of taxpayers who will be subject to the
AMT. The potential distributional effects of the AMT are summarized below.
^!Married taxpayers filing joint returns will be more likely to fall under the
AMT than will taxpayers filing as singles or heads of households. This
occurs because, in 2001, taxpayers filing joint returns received more
generous reductions in their regular income tax liabilities than did
taxpayers filing as singles or heads of households. As a result, at any
given income level, taxpayers filing joint returns have seen their regular
income tax liabilities reduced to levels that are near or actually below
their AMT liabilities.

¹ U.S. Congress. Joint Committee on Taxation. Present Law and Background Relating to the
Individual Alternative Minimum Tax, JCX-38-07, June 25, 2007.
² For more detailed information on the AMT see CRS Report RL30149, The Alternative
Minimum Tax for Individuals, by Steven Maguire.

^!Larger families will be more likely to fall under the AMT than will
smaller families. This occurs because personal exemptions, which are
allowed under the regular income tax, are not allowed under the AMT.
^!Taxpayers who itemize their deductions under the regular income tax and
who have large itemized deductions for state/local taxes will be more
likely to fall under the AMT than will taxpayers who do not itemize their
deductions or taxpayers who take only small deductions for state/local
taxes. This occurs because deductions for state/local taxes are not
allowed under the AMT.³ Taxpayers in high-tax states who claim
itemized deductions for state/local taxes will be more likely to fall under
the AMT than taxpayers in low-tax states who claim little or no
deductions for state/local taxes. Hence, taxpayers in high-tax states such
as New Jersey, New York, Connecticut, District of Columbia, and
Maryland will tend to be more adversely affected by the AMT than will
taxpayers in low-tax states such as South Dakota, Mississippi, Tennessee,
Alaska, and Alabama.⁴
^!In 2008, even taxpayers who do not itemize their deductions on their
regular income tax returns will be subject to the AMT at relatively
modest income levels. For instance, taxpayers filing joint returns with
two children (four personal exemptions) will be subject to the AMT
when their incomes exceed approximately $65,114. Taxpayers filing
joint returns with no children (two personal exemptions) will be subject
to the AMT when their incomes exceed approximately $74,660.⁵
Table 1 shows the effects of the AMT by adjusted gross income (AGI) levels for
selected years between 2005 and 2010 (data for 2006 is not available).
^! In 2006, taxpayers with AGIs in the $200,000 to $500,000 range were
the most affected by the AMT. Almost 74% of taxpayers in this income
range had AMT liabilities.
^!In 2008 and beyond, taxpayers with AGIs in the $100,000 to $500,000
range will be the most affected by the AMT. By 2010, more than 86%
of the taxpayers with AGIs of $100,000 to $200,000 will be subject to the
AMT. Approximately 98.1% of taxpayers with AGIs in the $200,000 to
$500,000 range will be subject to the AMT.

³ In addition to disallowing deductions for state/local taxes, the AMT does not allow
miscellaneous itemized deductions and allows deductions for medical expenses only to the extent
that they exceed 10% of AGI .
⁴ See CRS Report RL32942, State and Local Taxes and the Federal Alternative Minimum Tax,
by Steven Maguire, and CRS Report RS22083, Alternative Minimum Taxpayers by State: 2004,

2005 and Projections for 2008, by Steven Maguire.

⁵ For more information see CRS Report RS21817, The Alternative Minimum Tax (AMT): Income
Entry Points and “Take Back” Effects, by Gregg Esenwein.

^!The number of taxpayers with AGIs in the $50,000 to $100,000 range
who will fall under the AMT will grow steadily over the 2007 to 2010
period. By 2010, over 41% of the taxpayers in this income range will be
subject to the AMT.
^!The number of very high-income taxpayers (AGIs over $1,000,000)
subject to the AMT will increase over the 2006 through 2010 period.
To reiterate, it is the lack of indexation of the AMT combined with the reductions
in the regular income tax that are the primary factors responsible for producing these
results for taxpayers with AGIs between $50,000 and $500,000.
Table 1. Taxpayers With AMT Liability by Adjusted Gross Income in
2006 and 2010
Adjusted Gross Income20062010
Less than $20,0000.0%0.0%
$20,000 to $40,0000.0%0.6%
$40,000 to $50,0000.2%5.5%
$50,000 to $75,0000.5%17.4%
$75,000 to $100,0001.6%52.9%
$100,000 to $200,00010.2%85.6%
$200,000 to $500,00074.0%98.1%
$500,000 to $1,000,00047.3%70.9%
$1,000,000 and above23.1%31.5%
All taxpayers2.5%17.9%
Source: U.S. Congress. Joint Committee on Taxation. Present Law and Background Relating
to the Individual Alternative Minimum Tax, JCX-38-07, June 25, 2007.
The Joint Committee on Taxation recently released data that confirms the
distributional effects of the interaction between the recent reductions in the regular⁶
income tax and the AMT. This data shows, with the AMT and without the AMT, the
static change in tax liability that would occur by adjusted gross income (AGI) class if
certain portions of the 2001 and 2003 tax cuts were repealed. The JCT findings are
shown in Table 2.
For example, Table 2 shows that taxpayers with AGIs between $100,000 and
$200,000 would receive $53.1 billion in tax reductions from the 2001 and 2003 tax

⁶ U.S. Congress. Joint Committee on Taxation, “Tabulations,” memorandum of May 18, 2007.

reductions if there were no AMT. But because of the interaction of the AMT and the
regular income tax, this income group would receive only $28.5 billion in tax reductions.
Hence, the AMT takes back $24.8 billion or 46.5% of the regular income tax reductions
for this income group.
Table 2. Interaction Between the AMT and Recent Reductions in
the Regular Income Tax: The “Take Back” Effect for Tax Year 2008
Repeal of certain provisions of the 2001 and 2003 tax reductions -
static change in tax liability assuming no behavioral response
Adjusted GrossChange inChange in
Incomeincome taxincome taxDollar “takePercentage
(000s)liabilityliabilityback” effect“take back”
assuming noincluding theof AMTeffect of
AMTAMTAMT*
(billions) (billions)
$0 - $20$6.3$6.3$00%
$20- $40$26.5$26.5$00%
$40 - $50$10.6$10.5$0.10.9%
$50 - $75$24.5$23.7$0.83.3%
$75 - $100$25.1$19.7$5.321.5%
$100 - $200$53.3$28.5$24.846.5%
$200 - $500$37.4$13.7$23.763.4%
$500 - $1,000$20.5$17.3$3.215.6%
over $1,000$64.9$62.6$2.23.5%
^Source:^J^oⁱⁿ^{t Co}^m^m^{ittee o}ⁿ^T^a^x^a^tioⁿ^.^*^C^alcu^lated^b^y^CRS.
Table 2 also shows that the most significant interaction between the AMT and the
reduction in the regular income tax occurs for taxpayers with AGIs in the $75,000 to
$500,000 income range. For these taxpayers, the AMT takes back from 22% to 63% of
the recent reductions in the regular income tax. Taxpayers with AGIs in excess of $1
million are much less affected by the AMT, losing only about 3.5% of the reductions in
the regular income tax to the AMT.
Why Are Very High-Income Taxpayers Not
So Adversely Affected by the AMT?
Although the AMT was originally intended to make sure that high-income taxpayers
paid at least a minimum amount of federal income taxes, they will not be the group that
will be the most adversely affected by the AMT in the future. There are several reasons
why high-income taxpayers, especially those with adjusted gross incomes (AGIs) over
$500,000, will be less affected by the AMT than their lower-income counterparts.

First, for high-income taxpayers, the marginal tax rates they face under the regular
income tax tend to be higher than the marginal tax rates they face under the AMT. For
example under the regular income tax, the top two marginal income tax rates are 33% and

35%. The top rate under the AMT is 28%.

Second, under the regular income tax, personal exemptions are phased out for high-
income taxpayers. So the fact that personal exemptions are not allowed under the AMT
does not have a significant effect on high-income taxpayers who do not get personal
exemptions under the regular income tax.
Third, under the alternative minimum tax, the basic AMT exemption is phased out
for taxpayers filing joint returns when AMT taxable income exceeds $150,000.⁷ Hence,
many high-income taxpayers do not get a basic exemption under the AMT. Therefore,
the reduction in the basic AMT exemption will have no effect on their AMT liabilities.
Finally, high-income taxpayers generally derive a significant percentage of their total
income from capital gains and dividend income. Under both the regular income tax and
the AMT, the tax rate on long-term capital gains and dividend income is limited to a
maximum rate of 15%.

⁷ The basic AMT exemption is phased out for taxpayers with AMT taxable incomes in excess of
$150,000. In 2008, the basic AMT exemption of $45,000 for joint returns is completely phased
out at income levels in excess of $330,000.