**PRESENT LAW AND ISSUES**

**RELATING TO THE INDIVIDUAL**

**ALTERNATIVE MINIMUM TAX ("AMT")**

Scheduled for a Hearing

Before the

HOUSE COMMITTEE ON WAYS AND MEANS

on February 4, 1998

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

February 2, 1998

JCX-3-98

----

**CONTENTS
INTRODUCTION				

I.	OVERVIEW				

II.	PRESENT LAW AND LEGISLATIVE BACKGROUND			
- Present Law	 Legislative Background
III.	ANALYSIS OF ISSUES			
- Data on Taxpayers Affected by the AMT			 Issues				
**INTRODUCTION**

	The House Committee on Ways and Means has scheduled a public hearing on February 4,1998, on issues relating to the statutory and effective individual income tax rates, including thealternative minimum tax ("AMT") on individuals.  This document,(1) prepared by the staff of theJoint Committee on Taxation, describes present-law AMT rules, provides actual and projecteddata on the AMT and AMT taxpayers, and discusses issues relating to the present-law individualAMT.

	Part I of the document is an overview of the present-law individual AMT.  Part IIdescribes the present-law AMT rules and the legislative background of the AMT.  Part III is ananalysis of the issues presented by the present-law AMT, including data on the individual AMTand individual AMT taxpayers.

**I.  OVERVIEW**

**Present law and background**

	Present law imposes a minimum tax, known as the alternative minimum tax  ("AMT"),on an individual taxpayer to the extent the taxpayer's minimum tax liability exceeds his or herregular tax liability.  The individual AMT is imposed at rates of 26 and 28 percent on alternativeminimum taxable income in excess of a phased-out exemption amount.  Present law alsoimposes a minimum tax on corporations at a 20-percent rate upon an alternative minimumtaxable income base that generally is broader than that applicable to individuals.

	Alternative minimum taxable income is the taxpayer's taxable income increased bycertain preference items and adjusted by determining the tax treatment of certain items in amanner that negates the deferral of income resulting from the regular tax treatment of thoseitems.  Thus, for affected taxpayers, when compared to the regular tax, the AMT imposes alower marginal rate of tax on a broader base of income.

	If an individual is subject to AMT in any year, the amount of tax exceeding thetaxpayer's regular tax liability is allowed as a credit in any subsequent taxable year to the extentthe taxpayer's regular tax liability exceeds his or her tentative minimum tax in such subsequentyear and to the extent the taxpayer's AMT liability is a result of adjustments that are timing innature.  Most individual AMT adjustments are not timing in nature.

	In addition, the nonrefundable credits available to an individual to reduce his or herregular tax liability generally may not reduce the individual's minimum tax liability.  Thus, byacting as a floor for credit utilization, the AMT may affect the tax liability of individuals who donot actually pay the AMT.

	Individuals have been subject to some version of a minimum tax since 1969.  The currentformat of the AMT was enacted in 1978.  The Tax Reform Act of 1986 broadened the base ofthe individual AMT.  Since 1986, the base of the individual AMT has been somewhat narrowedand the marginal tax rates have been increased (generally, in conjunction with increases in themarginal income tax rates applicable to individuals under the regular tax).

**Analysis of issues**

	Relatively few individuals currently are subject to the AMT.  Those who are so subjecttend to be individuals with higher adjusted gross incomes.  However, over time, relatively moreindividuals will become subject to the AMT, including increasingly more middle-incomeindividuals.  These trends largely can be attributed to the fact that several features of the regulartax (e.g., personal exemptions, standard deductions, tax bracket break-points) are indexed forinflation, but similar features are not so indexed for AMT purposes. 

	The goal of all minimum taxes is for taxpayers with some measure of economic incometo pay at least a minimum amount of income tax.  This is generally accomplished by disallowingor limiting the use of specific deductions, exemptions, exclusions, accounting methods, and taxcredits.  

	As a separate system within the regular tax system, the AMT should be analyzed in termsof equity, efficiency, growth, and simplicity.  The individual AMT may act to increase theprogressivity of the income tax system. The effects of the AMT on the cost of capital andaggregate investment is uncertain.  The AMT creates additional compliance burdens and may beviewed as complex by taxpayers.

**II.  PRESENT LAW AND LEGISLATIVE HISTORY**

**A.  Present Law**

**In general**

	Present law imposes a minimum tax on an individual to the extent the taxpayer'sminimum tax liability exceeds his or her regular tax liability.(2) This alternative minimum tax("AMT") is imposed upon individuals at rates of (1) 26 percent on the first $175,000 ofalternative minimum taxable income in excess of a phased-out exemption amount and (2) 28percent on the amount in excess of $175,000. Since 1993, the exemptions amounts are $45,000in the case of married individuals filing a joint return and surviving spouses; $33,750 in the caseof other unmarried individuals; and $22,500 in the case of married individuals filing a separatereturn.  These exemption amounts are phased-out by an amount equal to 25 percent of theamount that the individual's alternative minimum taxable income exceeds a threshold amount. These threshold amounts are $150,000 in the case of married individuals filing a joint return andsurviving spouses; $112,500 in the case of other unmarried individuals; and $75,000 in the caseof married individuals filing a separate return, estates, and trusts. The exemption amounts, thethreshold phase-out amounts, and the $175,000 break-point amount are not indexed for inflation.The lower capital gains rates applicable to the regular tax also apply for purposes of the AMT.  

	Alternative minimum taxable income ("AMTI") is the taxpayer's taxable incomeincreased by certain preference items and adjusted by determining the tax treatment of certainitems in a manner that negates the deferral of income resulting from the regular tax treatment ofthose items. 

**Preference items in computing AMTI**

	The minimum tax preference items are:

	(1) The excess of the deduction for percentage depletion over the adjusted basis of theproperty at the end of the taxable year.  This preference does not apply to percentage depletionallowed with respect to oil and gas properties.

	(2) The amount by which excess intangible drilling costs arising in the taxable yearexceed 65 percent of the net income from oil, gas, and geothermal properties.  This preferencedoes not apply to independent producers to the extent the producer's AMTI is reduced by 40percent or less by ignoring the preference.

	(3) Tax-exempt interest income on private activity bonds (other than qualified 501(c)(3)bonds) issued after August 7, 1986.

	(4) Accelerated depreciation or amortization on certain property placed in service beforeJanuary 1, 1987.

	(5) Forty-two percent of the amount excluded from income under section 1202 (relatingto gains on the sale of certain small business stock.)

	In addition, losses from any tax shelter farm or passive activities are denied.(3)

**Adjustments in computing AMTI**

	The adjustments that all taxpayers (including corporations) must make are:

	(1) Depreciation on property placed in service after 1986 and before January 1, 1999,must be computed by using the generally longer class lives prescribed by the alternativedepreciation system of section 168(g) and either (a) the straight-line method in the case ofproperty subject to the straight-line method under the regular tax or (b) the 150-percent decliningbalance method in the case of other property.  Depreciation on property placed in service afterDecember 31, 1998, is computed by using the regular tax recovery periods and the AMTmethods described in the previous sentence.

	(2) Mining exploration and development costs must be capitalized and amortized over a10-year period.

	(3) Taxable income from a long-term contract (other than a home construction contract)must be computed using the percentage of completion method of accounting.

	(4) The amortization deduction allowed for pollution control facilities placed in servicebefore January 1, 1999 (generally determined using 60-month amortization for a portion of thecost of the facility under the regular tax), must be calculated under the alternative depreciationsystem (generally, using longer class lives and the straight-line method).  The amortizationdeduction allowed for pollution control facilities placed in service after December 31, 1998, iscalculated using the regular tax recovery periods and the straight-line method.

	The adjustments applicable only to individuals are:

	(1) Miscellaneous itemized deductions are not allowed;

	(2) Deductions for State, local, and foreign real property taxes; State and local personalproperty taxes; and State, local, and foreign income, war profits, and excess profits taxes are notallowed; 

	(3) Medical expenses are allowed only to the extent they exceed ten percent of thetaxpayer's adjusted gross income;

	(4) Standard deductions and personal exemptions are not allowed;

	(5) The amount allowable as a deduction for circulation expenditures must be capitalizedand amortized over a 3-year period;

	(6) The amount allowable as a deduction for research and experimental expendituresmust be capitalized and amortized over a 10-year period;(4) and 

	(7) The special regular tax rules relating to incentive stock options do not apply.

**Other rules**

	The combination of the taxpayer's net operating loss carryover and foreign tax creditscannot reduce the taxpayer's AMT liability by more than 90 percent of the amount determinedwithout these items.

	The various nonrefundable credits allowed under the regular tax generally are notallowed against the AMT.  The earned income credit and the child credit of those taxpayers withthree or more qualified children are refundable credits and may offset the taxpayer's tentativeminimum tax.  However, a taxpayer must reduce these refundable credits by the amount thetaxpayer's tentative minimum tax exceeds his or her regular tax liability.

	If an individual is subject to AMT in any year, the amount of tax exceeding thetaxpayer's regular tax liability is allowed as a credit (the "AMT credit") in any subsequenttaxable year to the extent the taxpayer's regular tax liability exceeds his or her tentativeminimum tax in such subsequent year.  For individuals, the AMT credit is allowed only to theextent the taxpayer's AMT liability is a result of adjustments that are timing in nature.  Mostindividual AMT adjustments relate to itemized deductions and personal exemptions and are nottiming in nature.(5)

**B.  Legislative Background**

**Minimum taxes prior to the Tax Reform Act of 1986**

	Individuals first became subject to an "add-on" minimum tax in 1969 because of aconcern with individuals sheltering much or all of their income from Federal income tax byinvesting in tax shelter activities.  The 1969 version of the minimum tax existed until 1982.  Inaddition, in 1978, Congress enacted a minimum tax that, in form, resembles the current AMT.(6) The 1978 tax was payable in addition to all other tax liabilities to the extent it exceeded theindividual's regular tax liability.  The tax was imposed at flat rate of 20 percent on alternativeminimum taxable income in excess of an exemption amount. A taxpayer's alternative minimumtax liability could be reduced by foreign tax credits and refundable credits.   An individual'salternative minimum taxable income was his or her adjusted gross income, increased by certainpreferences and reduced by alternative tax itemized deductions.  

	The tax preference items were: (1) dividends excluded from taxable income under prior-law section 116 (prior law allowed an individual to exclude up to $100 of dividends annually);(2) the excess of accelerated over straight-line depreciation in the case of real property; (3) theexcess of accelerated over straight-line depreciation (the latter using lengthened recoveryperiods) in the case of leased personal property; (4) the excess of 60-month amortization overthe amount of depreciation otherwise allowable in the case of certified pollution controlfacilities; (5) the excess of the deduction for expensed mining exploration and development costsover the amount that would be allowable if the costs were capitalized and amortized over a 10-year period; (6) the excess of the deduction for expensed circulation expenditures over theamount that would be allowable if the costs were capitalized and amortized over a 3-year period;(7) the excess of the deduction for expensed research and development expenditures over theamount that would be allowable if the costs were capitalized and amortized over a 10-yearperiod; (8) percentage depletion to the extent in excess of the adjusted basis of the depletableproperty; (9) that portion of net capital gains that were deductible from gross income (unless thegain related to the sale or exchange of a principal residence);(7) (10) the excess of the fair marketvalue received through the exercise of an incentive stock option over the exercise price; and (11)the amount by which excess intangible drilling costs deducted in the taxable year exceeded thenet income from oil, gas, and geothermal properties.  An individual could avoid some of thepreferences listed above by electing to defer regular tax deductions for circulation expenditures,research and experimental expenditures, intangible drilling costs, mining exploration anddevelopments costs, and depreciation.  An individual may have had an incentive to make such anelection even though it increased his or her regular taxable income in the year of the election inorder to reduce his or her alternative minimum tax liability in future years.  The election mayhave been attractive because the prior-law alternative minimum tax was, in many respects, an"add-on" system (i.e., the timing preferences could not "turn around" and reduce AMTI insubsequent years).  

	The itemized deductions that an individual could deduct for minimum tax purposes werecasualty or theft losses, gambling losses to the extent of gambling gains, charitable deductions,medical deductions to the extent in excess of 10 percent of the taxpayer's adjusted gross income,interest expense on qualified home indebtedness, other interest expense not in excess of qualifiednet investment income, and deductions for estate tax attributable to income in respect of adecedent.   

**Changes made by the Tax Reform Act of 1986**

	The 1986 Act broadened the base of the pre-existing individual alternative minimum tax. In addition, the 1986 Act increased the individual AMT rate to 21 percent, provided phase-outsof the exemption amounts, provided the AMT credit, and changed the individual AMT fromessentially an add-on system of preferences to a separate tax system of preferences andadjustments, the latter of which were deferral items that could "turn-around" (i.e., decreaseAMTI) over the life of the related property.  The 1986 Act also instituted the corporate AMT,replacing an "add-on" minimum tax.

**Changes made since the Tax Reform Act of 1986**

	Certain amendments have been made to the individual AMT base and rates since the1986 Act.  The principal changes are described below.

Tax rates and exemptions

	The individual AMT rate was raised from a flat 21 percent to a flat 24 percent by theOmnibus Budget Reconciliation Act of 1990 ("1990 Act"). The 1990 Act increased the topmarginal income tax rate applicable to individuals under the regular tax to 31 percent.  TheOmnibus Budget Reconciliation Act of 1993 ("1993 Act") instituted the two-tier individual AMTrate system (at 26 and 28 percent) of present law and increased the individual AMT exemptionamounts.(8)  The 1993 Act added the present-law 36-percent and 39.6-percent marginal income taxrates applicable to individuals under the regular tax.

Depreciation

	Several changes have been made to the depreciation adjustment.  Prior to 1986, theamount by which accelerated depreciation exceeded straight-line depreciation on real and leasedpersonal property placed in service after 1980 was an AMT preference.  In the case of leasedpersonal property, straight-line depreciation was computed by the extending the regular taxrecovery period for such property.  The 1986 Act retained this preference and generally providedthat for property placed in service after 1986 (including personal property not subject to a lease),depreciation for AMT purposes would be computed using (1) the 150-percent declining balancemethod (for property using an accelerated method for regular tax purposes) or the straight-linemethod (for property using such method for regular tax purposes) and (2) the recovery periodsprovided by the alternative depreciation system of section 168(g) (which generally were longerthan the lives used for regular tax purposes.) The Taxpayer Relief Act of 1997 provided thatAMT depreciation is computed using the regular tax recovery periods for property placed inservice after 1998.       

Oil and gas provisions

	The 1986 Act version of the AMT contained several provisions that related to oil and gasexploration and production.(9)  Preferences included (1) the deduction for percentage depletion tothe extent the deduction exceeded the adjusted basis of the property and (2) the amount by whichexcess intangible drilling costs ("IDCs" ) arising in the taxable year exceeded 65 percent of thenet income from oil and gas properties.  "Excess IDCs" was the amount by which the regular taxdeduction for IDCs exceeded the amount that would have been deducted had such costs beencapitalized and amortized over a 120-month period.

	The 1990 Act provided a special energy deduction for purposes of reducing AMTI.  Thededuction was based on a specific portion of the various oil and gas related preference and ACEadjustment items.  Specifically, the special energy deduction was initially determined bydetermining the taxpayer's IDC preference and marginal production depletion preference.  Theamount of these preferences was the amount that the taxpayer's AMTI would have been reducedhad the AMT rules relating to IDCs and percentage depletion on marginal properties not applied. The IDC preference was divided between qualified exploratory costs and other costs and eachportion, and the marginal production depletion preference, were multiplied by specifiedpercentages.  These three products were added together to comprise the special energydeduction.  The special energy deduction was not allowed to the extent it exceeded 40 percent ofthe taxpayer's AMTI (determined without this deduction and net operating losses).  In addition,the special energy deduction was phased-out if the average price of crude oil exceeded $28 abarrel in the prior year.

	The special energy deduction was repealed in the Energy Policy Act of 1992, which alsorepealed the preferences for the deductions of IDCs and percentage depletion of oil and gasproducers other than integrated oil companies.  The repeal of the IDC preference could notreduce a taxpayer's AMTI by more than 40 percent (30 percent in 1993) of the amount that thetaxpayer's AMTI would have been had the preference not been repealed.

Charitable contributions of appreciated property

	Under the regular tax, a taxpayer generally is allowed to deduct the fair market value ofappreciated property contributed to a charity.  The 1986 Act included a preference that limited ataxpayer's deduction for the charitable contribution of appreciated property to the taxpayer'sadjusted basis in the property.  The 1990 Act repealed this preference for tangible personalproperty contributed in taxable years beginning in 1991 and contributions made before July 1,1992, in taxable years beginning in 1992.  The 1993 Act repealed the preference for tangiblepersonal property contributed after June 30, 1992, and other appreciated property contributedafter December 31, 1992.

Miscellaneous changes

	The Omnibus Budget Reconciliation Act of 1989 made minor changes to the individualAMT.  These changes: (1) excepted small home construction contracts from the AMT long-termcontract rules and (2) repealed the AMT adjustment for research and development expendituresfor individuals who actively participate in the underlying business.  The Taxpayer Relief Act of1997 clarified that farmers may use the installment method for AMT purposes.

	Moreover, certain changes have been made to the regular income tax to more closelyconform its base to the AMT base.  For example, many of the preference limitations contained inthe pre-1986 individual alternative minimum tax were enacted, in part, because of a concernwith individuals investing in tax shelter activities.  The 1986 Act directly addressed this concernwith the enactment of the passive activity rules of section 469.  Similarly, the AMT adjustmentsrelating to installment sales by dealers and long-term contracts have applied to relatively fewtaxpayers because since 1986, Congress has, with some exceptions, adopted the AMT treatmentfor these items for regular tax purposes.

**III.  ANALYSIS OF ISSUES**

**A.  Data on Taxpayers Affected by the AMT**

	Relatively few individuals have been subject to the AMT.  Table 1 presents individualAMT data and projections for the 1987-2008 tax years.

**Table 1.--Actual and Projected Individual Income Tax Returns With Tax Liability Under the IndividualAlternative Minimum Tax, 1987-2008**YearNumber of returns paying AMT (thousands)Percentage of returns paying AMTExcess of AMT liability over regular tax liability ($ billions)19871400.11.71988134	0.11.019891170.10.819901320.10.819912440.21.219922870.31.41993	3350.32.119943690.32.219954140.42.31996data not available1997data not available19988560.74.319999520.84.620001,1410.95.120011,3911.15.720021,7821.46.520032,3781.97.620042,9052.28.920053,9423.010.620065,0783.812.920076,5874.915.920088,8306.519.8Note:  These statistics represent taxpayers who actually pay AMT and do not include taxpayers whose regular taxliabilities are affected by the AMT through tax credit limitations.  See Tables 5, 6, and 7 for such data.Source:  Internal Revenue Service, *Statistics of Income*, 1987-1995; projections for years 1998-2008 from Joint Committee on Taxation staff estimates.
	Tables 2 and 3 below report how individual AMT taxpayers are estimated to bedistributed across various income classes in 1998 and 2008.  

**Table 2.--Distribution of Individual AMT Taxpayers with AMT Liability under Present Law, 1998**
Income category(1)Number of returns(thousands)AMT taxpayers as a percentage of all taxpayersLess than $10,000(2)(3)$10,000 to less than 20,0001(3)$20,000 to less than $30,000(2)(3)$30,000 to less than $40,00090.1$40,000 to less than $50,000140.1$50,000 to less than $75,000680.3$75,000 to less than $100,000971.0$100,000 to less than $200,0002703.2$200,000 and over38817.9**Total (all taxpayers)****848****0.8**(1)  The income concept used to place tax returns into income categories is AGI plus: (a) tax-exempt interest; (b)employer contributions to health plans and life insurance; (c) employer share of FICA tax; (d) workerscompensation; (e) nontaxable social security benefits; (f) insurance value of Medicare benefits; (g) AMTpreference items; and (h) excluded income of U.S. citizens living abroad.  Excludes individuals who aredependents of other taxpayers and taxpayers with negative income, resulting in differences with Table 1. (2)  Less than 500(3)  Less than .05 percentDetails may not add due to rounding.Source: Staff of the Joint Committee on Taxation
**Table 3.--Distribution of Individual AMT Taxpayers with AMT Liability under Present Law, 2008**
Income category(1)Number of returns(thousands)AMT taxpayers as a percentage of all taxpayersLess than $10,000(2)(3)$10,000 to less than 20,000(2)(3)$20,000 to less than $30,0009(3)$30,000 to less than $40,0001570.9$40,000 to less than $50,0002481.8$50,000 to less than $75,0001,3565.8$75,000 to less than $100,0002,70019.7$100,000 to less than $200,0003,04326.6$200,000 and over1,31042.7**Total (all taxpayers)****8,822****7.2**(1)  Same income concept as used in Table 2, measured at 1998 levels. (2)  Less than 500(3)  Less than .05 percentDetails may not add due to rounding.Source: Staff of the Joint Committee on Taxation
	The increase in the number of taxpayers subject to the AMT largely can be attributed tothe fact that the personal exemptions, standard deduction, and tax bracket break points of theregular tax are indexed for inflation, while the AMT exemption amounts and tax bracket breakpoint are not indexed for inflation.  Proposals that would increase or index these amounts woulddecrease the number of taxpayers subject to the AMT and reduce the tax burden of thoseindividuals otherwise subject to the AMT.(10)  Even with indexing, one would expect some growthin AMT taxpayers as real (i.e., inflation-adjusted) incomes rise over time.

	The lack of indexing in the AMT also explains the increase of AMT taxpayers in themiddle-income categories.  Under present law, the relatively large AMT exemption amounts(11)shelter most of a low- or middle-income taxpayer's AMTI from tax.  However, over time, withinflation, a taxpayer's income is expected to grow in nominal dollars.  Most of this inflatedincome of a middle-income individual will remain subject to tax at a 15-percent rate for regulartax purposes because the personal exemptions, standard deduction, and tax bracket break pointsof the regular tax are indexed for inflation.  However, for AMT purposes, relatively less of thetaxpayer's inflated income will be sheltered by the unindexed AMT exemption amount and theamount not sheltered will become subject to the higher AMT rate of 26 percent. Because theAMT exemption amounts are phased out over relatively high levels of AMTI, indexing theseamounts would provide benefits to taxpayers in all income classes.(12)

	Table 4 demonstrates the results if the AMT exemption amounts were indexed forinflation, starting in 1999.  With indexing, the number of taxpayers subject to AMT and theamount of AMT collected is expected to remain relatively constant. 

**Table 4.--Projected Individual Income Tax Returns With Tax Liability Under the Individual AMT If Exemptions Were Indexed, 1999-2008**YearNumber of returns paying AMT (thousands)Percentage of returns paying AMTExcess of AMT liability over regular tax liability ($ billions)19998740.74.520009080.74.720019170.75.020029620.85.320031,0320.85.720041,0600.86.120051,1350.86.620061,2240.97.120071,3421.07.720081,4821.08.4Source: Staff of the Joint Committee on Taxation   
	As described above in Part II. A., above, the AMT acts as a floor with respect to theutilization of nonrefundable credits in that a taxpayer is allowed to reduce his or her regular taxliability with otherwise allowable credits only to the extent the taxpayer's regular tax exceeds hisor her tentative minimum tax.  Tables 5, 6, and 7 demonstrate the estimated effects of the AMTon all nonrefundable tax credits, the child credit, and the education credits, respectively. Projections on the child and education credits are provided because these credits were onlyrecently enacted by the Congress in 1997, they significantly increased the number of taxpayerseligible for nonrefundable credits, and they were targeted toward taxpayers with middleincomes. 

	Consistent with the projections in Table 1, relatively few taxpayers currently have taxcredit utilization that is limited because of the AMT.  However, over time, the number oftaxpayers subject to this limitation is expected to increase.  This pattern is consistent with theexpected increase in the number of AMT taxpayers.

**Table 5.--Projected Individual Income Tax ReturnsWith Nonrefundable Tax Credits, 1998 and 2008(1)(in millions)**
Taxable Year 1998Taxable Year2008Returns with nonrefundable credits38.138.7Returns receiving full credits25.219.5Returns receiving zero or less than full credits12.919.2Returns receiving zero or less than full credits due to AMT limitations0.78.9(1) Measured after any phase-out limitations.Source: Joint Committee on Taxation 
**Table 6.--Projected Individual Income Tax Returns With Child Credits, 1998 and 2008(1)(in millions)**Taxable Year 1998Taxable Year2008Returns with dependents under age 1738.139.1Returns receiving full child credit23.017.4Returns receiving zero or less than full child credit15.121.7Returns receiving zero or less than full child credit due to AMT limitations0.57.9(1) Includes refundable portion of the credit.Source: Joint Committee on Taxation 
**Table 7.--Projected Individual Income Tax ReturnsWith HOPE and Lifetime Learning Credits, 1998 and 2008 (in millions)**Taxable Year 1998Taxable Year2008Returns with tuition expenses11.614.1Returns receiving full education credit6.24.7Returns receiving zero or less than full education credit5.49.4Returns receiving zero or less than full education credit due to AMT limitations0.33.3Source: Joint Committee on Taxation 
**B.  Issues**

	The individual AMT is a separate system within the individual income tax system thatapplies lower tax rates to broader bases of income.  As a separate system, the AMT should beanalyzed in terms of equity, efficiency, growth, and simplicity.  In addition, the separatepreferences and adjustments within the individual AMT may be subject to the same analysis.

**Equity**

	In practice, the AMT has the effect of requiring more taxpayers to remit at least somefunds to the Federal Treasury every year than would be the case if only the regular income taxesapplied.  This occurs if (1) the taxpayer's tentative minimum tax exceeds his or her regular taxliability, or (2) the use of tax credits allowed under the regular tax is limited by the taxpayer'stentative minimum tax.  To the extent that taxpayers who outwardly appear to have the ability topay taxes indeed do pay taxes, some observers conclude that the AMT increases the perceivedfairness of the income tax system.

	Indeed, the rationale for enacting the original individual minimum tax in 1969 andrevising it in 1986 were perceptions that some taxpayers were able to avoid paying tax onrelatively large incomes.  Minimum tax legislation targeted those deductions, exemptions,exclusions, accounting methods, and tax credits that were considered to have contributed to suchresults.  Some of the enacted AMT preferences and adjustments relate to business or investmentincome (e.g., the depreciation adjustment and the private activity tax-free bond preference) whileothers relate to regular-tax items that are more personal in nature (e.g., the denial of personalexemptions and certain itemized deductions).

	To assess whether the AMT promotes the overall equity of the tax system, it is necessaryto look beyond who remits tax payments to the Federal Treasury to who bears the burden of theAMT.  Regarding the individual income tax, while economists generally believe that incometaxes on wages are borne by taxpayers who supply labor, there is disagreement concerning theincidence of taxes that affect the returns earned by capital such as the taxation of interest,dividends, capital gains, and business income from pass-through entities. Economists generallyargue that businesses do not bear the burden of the tax (including the AMT), but ratherindividuals bear the burden of the tax.  There is disagreement, however, over which individualsbear the burden of a business income tax, whether it is customers in the form of higher prices,workers in the form of reduced wages, owners of all capital in the form of lower after-tax returnson investment, or some combination of these individuals.(13)

	The uncertainty regarding the incidence of income taxes on the returns to capital make itdifficult to assess the effect the AMT has on the equity of the burden of the income tax system. The AMT raises average tax rates for affected taxpayers.  That is, the AMT increases the amountof the affected taxpayer's tax liability as a percentage of his or her income.  At the individuallevel, higher-income taxpayers are more likely to be AMT taxpayers than are lower-incometaxpayers (see Table 2 above).  If the burden of the taxes were to rest with the affectedtaxpayers, the individual AMT might increase the overall progressivity of the income taxsystem.

	Some analysts argue that the AMT promotes horizontal equity by taxing more equallytaxpayers who have the same economic capacity but choose to engage in different patterns oftax-favored activities.(14)  Other analysts note that in a market economy, investment by taxpayerswould be expected to equilibrate risk-adjusted, after-tax returns.  As a consequence, the prices oftax-favored investments would be bid up (or their quantity increase) and the prices of tax-disfavored investments would fall (or their quantity decrease).  In equilibrium, the pre-taxreturns of tax-favored and tax-disfavored investments would differ, but their after-tax returnswould be the same.(15)  For example, tax-exempt bonds trade at interest rates lower than otherwisecomparable taxable bonds.  This is because the tax-exempt borrower does not have to offer asgreat an interest rate to the lender to provide the lender with a competitive after-tax return.  Ifafter-tax returns equilibrate, analysts may question whether a horizontal inequity existed prior tothe enactment of the AMT.

	The AMT also raises equity issues with respect to preference items that are personal innature.  For example, some believe that it is fair that families with multiple dependents pay lesstax than families with fewer dependents and support the regular-tax allowance of personalexemptions and child credits to further this goal.  The AMT, in disallowing these exemptionsand credits, may frustrate this perception of fairness.  

**Efficiency and growth**

	A tax system is efficient if it does not distort the choices that would be made in theabsence of the tax system.  No tax system can be fully efficient.  Whether the AMT contributesto the efficiency of the United States tax system depends on the extent to which it reduces otherinefficiencies in the tax system and the extent to which it creates new inefficiencies.  Bydiscouraging some taxpayers from undertaking what are otherwise tax-favored investments,efficiency may be increased to the extent that the tax-favored investments are inefficient. However, the AMT generally does not eliminate tax-favored treatment of certain activities orinvestments, but rather limits which taxpayers may take full advantage of the tax-favoredtreatment provided by the regular income tax.  In addition, limiting which taxpayers canprofitably undertake tax-favored activities could lead to more efficient investors finding theactivity unprofitable, while less efficient investors find the activity profitable.  Moreover, sometax-favored activities may be permitted as part of the regular income tax as a way to reducesome other inefficiency in the economy.  These arguments might suggest that efficiency couldbe better improved by changes in the regular income taxes.(16)

	In addition, the AMT may affect the level of investment in the United States and therebyaffect economic growth.  By increasing average tax rates (the total tax paid by certaintaxpayers), the AMT may reduce the cash flow of potential investors.  If as some analystsbelieve, investors' cash flows are important to the investment decision, the AMT may reduceaggregate investment.  Further, the effect of the AMT on effective marginal tax rates, andthereby on the cost of capital, may change the incentive to undertake marginal investmentprojects and thereby affect the level of aggregate investment.

	Some specific preferences and adjustments within the AMT seem inconsistent with otherparts of the AMT and thus may lead to inefficiencies.  For example, it is often presumed that onegoal of the AMT is to apply tax to a better measure of economic income, relative to the regulartax.  It is generally conceded that in measuring economic income, deductions should be allowedfor expenses incurred in the production of income.  However, the AMT disallows the deductionof miscellaneous itemized deductions--including unreimbursed employee business expenses andinvestment expenses that relate to the production of income.  The disallowance of suchdeductions may lead to inefficiencies as taxpayers may be discouraged from certain otherwiseprofitable investments or activities or encouraged to rearrange their affairs to secure AMTdeductions for such costs (e.g., by attempting to move such deductions "above-the-line").      

**Simplicity and compliance**

	The AMT requires a calculation of a second income tax base and computation of a tax onthat base, so the present tax system, with an AMT, is not as simple to administer or comply withas would be the same system without an AMT.  As detailed above, relatively few taxpayerscurrently are subject to the AMT.  However, this observation understates the extent to which theAMT imposes a compliance burden on taxpayers.  Many taxpayers must undertake the AMTcalculation to determine whether, in fact, they are liable or whether the utilization of certaincredits is limited.  

	Tables 1, 5, 6, and 7, above, indicate that many more individuals will become affected bythe AMT in the future.  There are no studies that specifically measure compliance costs arisingfrom the individual AMT.  Indirect evidence of the complexity imposed by the individual AMTmay be the increased utilization of the services of paid tax preparers by individual taxpayerssubject to the individual AMT.  In 1988, 14 percent of taxpayers with AGI of $100,000 or moreand no significant farming or self-employment income prepared their own tax returns.  Oftaxpayers with AGI of $100,000 or more and significant income from self-employment orfarming, nine percent and four percent of taxpayers prepared their own returns.  By contrast,only one percent of all taxpayers subject to the individual AMT prepared their own returns.(17)  Iftaxpayers subject to the AMT are more likely to have complicated financial affairs, they mightuse paid tax preparers even in the absence of the AMT.  However, Tables 2 and 3 indicate thatmiddle-income taxpayers, whose financial affairs are less likely to be complicated, are morelikely to become subject to the AMT in the future and thus may be faced with more complicatedtax compliance burdens.

1.   This document may be cited as follows:  Joint Committee on Taxation, *Present Law andIssues Relating to the Individual Alternative Minimum Tax ("AMT")* (JCX-3-98), February 2,1998.
2.   Present law also imposes a 20-percent alternative minimum tax on corporations.  Theincome base for the corporate alternative minimum tax is broader than the base applicable toindividuals.  For a discussion of the corporate alternative minimum tax, see, Joint Committee onTaxation, *Present Law and Issues Relating to the Corporate and Individual Alternative MinimumTax (AMT)* (JCX-22-95), May 2, 1995.
3.   Given the passage of section 469 by the Tax Reform Act of 1986 (relating to thedeductibility of losses from passive activities), these provisions are largely "deadwood."
4.   No adjustment is required if the taxpayer materially participates in the activity thatrelates to the research and experimental expenditures.
5.   See, Robert H. Harvey and Jerry Tempalski, "The Individual AMT: Why It Matters,"National Tax Journal, Vol. L, No. 3, September 1997, 453, at 468, which estimates that personalexemptions, standard deductions, State and local tax deductions, medical expense deductions,and miscellaneous itemized deductions collectively comprise 73.4 percent of individual AMTpreferences and adjustments for 1997.
6.  The goal of all minimum taxes is for taxpayers with some measure of economic incometo pay at least a minimum amount of income tax. The difference between an "add-on" minimumtax and an AMT is that under the "add-on" method, taxpayers compute their regular tax liabilityand add to it a separate tax on specific preference items.  Under an AMT, taxpayers generallycompute their taxable incomes and tax liabilities twice--once under the regular system and againunder the AMT system--and pay the greater amount.  
7.  Prior to the 1986 Act, individuals could deduct from income up to 60 percent of netcapital gains.
8.  Prior to the 1993 Act, the AMT exemptions amounts were $40,000 in the case ofmarried individuals filing a joint return and surviving spouses; $30,000 in the case of otherunmarried individuals; and $20,000 in the case of married individuals filing a separate return.
9.   As discussed above, the individual minimum taxes in effect before the 1986 Act alsocontained preferences with respect to oil and gas exploration and production. 
10.   Both the House- and Senate-passed versions of H.R. 2014, the "Taxpayer Relief Actof 1997," would have increased or indexed the exemption amounts of the individual AMT.However, the final conference agreement on H.R. 2014 as passed by the Congress and signed bythe President, did not contain any provision to change the AMT exemption amounts (P.L. 105-34, August 5, 1997).    
11.   The exemptions amounts are $45,000 in the case of married individuals filing a jointreturn and surviving spouses; $33,750 in the case of other unmarried individuals; and $22,500 inthe case of married individuals filing a separate return.
12.   The phase-out ranges are $150,000 to $330,000 of AMTI for married individualsfiling a joint return and surviving spouses; $112,500 to $262,500 of AMTI for other unmarriedindividuals; and $75,000 to $165,000 of AMTI for married individuals filing singly.
13.   For a discussion of incidence of taxes on the return to capital, see, Joint Committee onTaxation, *Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens*(JCS-7-93), June 14, 1993, pp. 44-51.
14.   This argument was stronger upon enactment of the Tax Reform Act of 1986 than it istoday.  Since 1986, several preferences and adjustments have been eliminated or modified,including those relating to charitable gifts of appreciated property, percentage depletion andintangible drilling costs for oil and gas properties, installment sales of farmers, and depreciationfor tangible property.   
15.  Andrew B. Lyon, "The Alternative Minimum Tax: Equity, Efficiency, and IncentiveEffects," in *Economic Effects of the Corporate Alternative Minimum Tax*, (Washington, D.C.:American Council for Capital Formation Center for Policy Research), 1991, pp. 51-82.  Seealso, Andrew B. Lyon, *Cracking the Code: Making Sense of the Corporate Alternative MinimumTax*, (Washington, D.C.: The Brookings Institution Press), 1997.
16.   Congress has, in certain instances, conformed the regular tax base to the broader AMTbase.  For example, the regular tax rules applicable to installment sales and long-term contractsgenerally have been amended to conform to the AMT treatment.  In other instances, the AMTrules have been liberalized to conform to the regular tax treatment (e.g., the use of the samerecovery periods for depreciable property).   
17.   Based on tabulations of the staff of the Joint Committee on Taxation of the 1988 IRSTaxpayer Compliance Measurement Program (TCMP).**