# Presentation: 202524

## The Individual Alternative Minimum Tax

***President’s Advisory Panel on ***
***Federal Tax Reform***
***3 March 2005***
**Leonard E. Burman**
**Senior Fellow, The Urban Institute**
**Codirector, The Tax Policy Center**
**Visiting Professor, Georgetown Public Policy Institute**

## Background

- 1966:  155 high-income taxpayers paid no income tax
- 1969: creation of a minimum tax designed to ensure high income filers did not exploit tax laws to reduce or eliminate their federal income tax liability
- 2010:  AMT will affect 30 million taxpayers, including virtually all upper middle class families with two or more kids.

## Determination of AMT Liability 

- Add preferences and adjustments to taxable income
- Subtract AMT exemption
- Calculate tax using AMT rate schedule and rules
- If more than regular tax, pay the difference as AMT
- (Many complexities left out of this simplified explanation.)

## AMT Exemptions and Schedule

- AMT exemption currently $58,000 for couples, $40,250 for singles
- In 2006, exemption drops to $45,000/$33,750
- Exemption phases out at higher incomes, creating high implicit tax rates
- Statutory rates = 26% and 28%, but exemption phaseout creates phantom rates of 32.5% and 35%
- _Not indexed for inflation_

## AMT Preference Items

**State and local tax deductions ***(51% of total)*
**Personal Exemptions ***(22%)***	**
**Miscellaneous deductions above the 2% floor ***(20%)*
**Net Operating Losses ***(12%)*
**Incentive Stock Options ***(2%)*
**Passive Activity Loss*** (2%)*
**Post-1986 Depreciation ***(1%)*
**Standard Deduction ***(1%)*
**Private Activity Bonds Interest ***(1%)*
**Medical Deductions ***(1%)*
- Note:  Sum adds to more than 100 percent because some adjustments not shown, such as state tax refunds, are negative.
- Source:  Burman and Weiner, “Suppose they Took the AM out of the AMT.”

**Notes:**
TRA1986 unleashed the true ugliness of the blob
Converted add-on tax to an alternative tax
AMTI = TI + personal exemptions + standard deduction + certain itemized deductions + tax preference items
Prior to 1986, big preference item was capital gains, which comprised 85 percent of AMT tax preferences;  TRA taxed gains in full under ordinary tax, so needed some new preferences
1993:  progressive rates of 26 and 28 percent; the exemption level was raised to $45,000 for couples, $33,750 for singles and heads of household
UNINDEXED
1998 (extended in 1999, 2001):  allowed use of personal credits against AMT 

## Causes of AMT Growth

*Effect of failure to *
*index for inflation*

- Pre-2001 Law,
- with indexing

- Current Law (extended)

*Effect of income tax cuts without permanent AMT fix*

- Pre-2001 Law

- Urban-Brookings Tax Policy Center Microsimulation Model, 2005

## AMT Projections

- Baseline AMT revenue = $1.2 trillion from 2005-15
- $670 billion if the tax cuts are not extended in 2010
- About 4% of taxpayers on AMT in 2005
- 20% in ’06 and 30% in ’10

## AMT Demographics (2010)

- AMT inflicts large marriage/child penalties
- 48% of married couples vs. 3% of singles on AMT
- 94% of marrieds with 2+ kids and AGI between $75&100K
- Residents of high-tax states are 5 percentage points more likely to be on AMT than those in low-tax states

## Drifting Off Target

- Though intended to make high-income people pay tax, AMT will increasingly hit middle class
- Over 80% of AMT taxpayers will have income < $200K in 2010
- More than 1/3 have income < $100K
- Families earning $75-100K 18% more likely to be on AMT than those earning over $1 million
- Those earning $100-200K more than twice as likely as millionaires

## Problems with the AMT

- Good Tax Policy is...
- Simple
- Efficient
- Fair
- The AMT violates all of these principles.

## Pointless Complexity

- Many middle class taxpayers must file AMT Form 6251, but owe no AMT
- AMT rules regarding credits, capital gains, dividends, deferral preferences very complex
- Most deferral preferences don’t even generate much revenue, just change the timing of tax payments
- Vastly complicates tax planning

## Efficiency

- The AMT *raises *marginal tax rates for most
- 71% of AMT taxpayers face *higher* marginal tax rates under AMT in 2005
- 92% will be in that situation in 2010
- People creep into higher brackets over time because, unlike the regular income tax, AMT is not indexed
- Might enhance efficiency to extent that it deterred tax shelters, but 90% of AMT preferences have nothing to do with shelters

## Equity

- Nasty marriage/child penalties
- Some legitimate adjustments to ability to pay are disallowed under AMT (e.g., contingent legal fees)
- AMT makes the tax system more progressive, but less so over time
- Relatively little tax collected from very rich

## Conclusions

- Pointless complexity and bizarre pattern of taxes
- Increasingly a tax on the upper middle class
- Better to build anti-tax shelter provisions into regular tax and adjust rates to hit revenue target

## Appendix

- Supplemental tables and charts
- Further reading

## AMT Exemptions and Schedule

## Rate Schedule for Couples, AMT vs. Regular Tax:  2004

## Total AMT Revenue, 2005-15

- Urban-Brookings Tax Policy Center Microsimulation Model, 2005

**Total AMT Revenue, 2005-15**

- Current Law (extended)

- Pre-EGTRRA Law

## By 2008, it will cost more to repeal the AMT 

**By 2008, it will cost more to repeal the AMT **
**than the regular income tax.**

- Urban-Brookings Tax Policy Center Microsimulation Model, 2005

**Cost of ****repealing**** the regular tax**

**Cost of ****repealing**** the AMT**

## AMT Projections by 

- Individual Characteristics

**Percent on AMT**

**Current Law**

**Characteristic**

**2005**

**2006**

**2010**

**Percent of Taxpayers**

- 3.8

- 20.4

- 30.4

**Percent of Tax Filers**

- 2.7

- 14.6

- 22.6

**by Filing Status**

- Single

- 0.8

- 1.6

- 2.9

- Married Filing Joint

- 5.2

- 30.7

- 47.9

- Head of Household

- 0.8

- 4.2

- 7.9

- Married Filing Separate

- 5.9

- 29.0

- 45.9

- Urban-Brookings Tax Policy Center Microsimulation Model, 2005

**Addendum:  AMT Revenue in $billions, 2005-2015**
**  **Current Law
-   Current Law Extended

## AMT Projections by 

- Individual Characteristics

**AMT Participation Rate (percent) **

**Current Law**

**Characteristic**

**2005**

**2006**

**2010**

**Filers by Number of Children**

- 0

- 1.8

- 8.3

- 15.6

- 1

- 2.5

- 17.6

- 27.9

- 2

- 5.0

- 31.4

- 40.6

- 3 or more

- 8.4

- 37.0

- 47.7

** ****Filers By State Tax Level***

- Low

- 0.8

- 10.5

- 18.3

- Middle

- 1.3

- 13.9

- 22.6

- High

- 2.7

- 15.8

- 23.8

- *Excludes effect of sales tax deduction, in effect for 2005.
- Urban-Brookings Tax Policy Center Microsimulation Model, 2005

**Married Couple, 2+ kids,**
**75k<AGI<100k**

- 1.6

- 77.2

- 94.4

## AMT Projections by Income

**AMT Participation Rate (percent) **

**Current Law**

**Cash Income **
**(thousands  of 2003$) **

**2005**

**2006**

**2010**

- 75-100

- 0.8

- 6.8

- 53.4

- 1,000 and more

- 39.3

- Less than 30

- 0.0

- 30-50

- 0.1

- 50-75

- 0.5

- 100-200

- 500-1,000

- 200-500

- 26.7

- 31.8

- 63.0

- 87.0

- 51.8

- 0.0

- 1.1

- 6.0

- 33.4

- 53.4

- 81.0

- 93.9

- 62.6

- 0.0

- 2.9

- 16.9

- 35.3

- Urban-Brookings Tax Policy Center Microsimulation Model, 2005

## Percent of AMT Taxpayers who Face Higher Marginal Tax Rates Under the AMT

## Distribution of AMT versus Regular Tax Liability: 2005 & 2010

## Further Reading

- Burman, Leonard E. and David Weiner.  2004.  “Suppose They Took the AM out of the AMT?”  available at _[www.taxpolicycenter.org](http://www.taxpolicycenter.org/)_.  (examines issues raised if the AMT were a standalone income tax)
- Burman, Leonard E., William G. Gale, Jeffrey Rohaly, Matthew Hall, and Mohammed Adeel Saleem.  2004.  “AMT:  A Data Update”  available at _[www.taxpolicycenter.org](http://www.taxpolicycenter.org/)_.  (includes estimates of some reform options)
- Burman, Leonard E., William G. Gale and Jeffrey Rohaly. 2003. “Policy Watch:  The Expanding Reach of the Individual Alternative Minimum Tax,” with *Journal of Economic Perspectives* 17(2):  173-186.
- Burman, Leonard E., William G. Gale, Jeffrey Rohaly, and Benjamin H. Harris. 2002. “The Individual AMT: Problems and Potential Solutions,” *National Tax Journal *55(3):  555-596.
- Feenberg, Daniel R., and James M. Poterba.  2004.  “The Alternative Minimum Tax and Effective Marginal Tax Rates,” *National Tax Journal* 57(2):  407-427.
- General Accounting Office. 2000. “Alternative Minimum Tax: An Overview of its Rationale and Impact on Individual Taxpayers.” Report to the Chairman, Committee on Finance, U.S. Senate (GAO/GGD-00-180). August.
- Harvey, Robert P. and Jerry Tempalski. 1997. “The Individual AMT: Why it Matters.” *National Tax Journal *50(3): 453-473.
- Rebelein, Robert and Jerry Tempalski. 2000. “Who Pays the Individual AMT?” U.S. Department of the Treasury, OTA Paper 87.