PRESENT LAW AND BACKGROUND RELATING TO 

THE INDIVIDUAL ALTERNATIVE MINIMUM TAX 

Scheduled for a Public Hearing 

Before the 

SUBCOMMITTEE ON TAXATION AND IRS OVERSIGHT 

of the 

SENATE COMMITTEE ON FINANCE 

on May 23, 2005 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

May 20, 2005 

JCX-37-05 
ii 

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

EXECUTIVE SUMMARY ............................................................................................................ 2 

I. PRESENT LAW AND BACKGROUND RELATING TO THE INDIVIDUAL 

ALTERNATIVE MIMIMUM TAX...................................................................................... 4 

A. Present Law...................................................................................................................... 4 

B. Legislative Background ................................................................................................... 8 

II. DATA AND DISCUSSION OF ISSUES............................................................................ 10 

A. Data................................................................................................................................ 10 

B. Discussion of Issues....................................................................................................... 15 
1

INTRODUCTION 

The Subcommittee on Taxation and IRS Oversight of the Senate Committee on Finance 

has scheduled a public hearing on May 23, 2005, on the Individual Alternative Minimum Tax 

(“AMT”). This document,1

 prepared by the staff of the Joint Committee on Taxation, includes a 

description of present law and analysis relating to the individual AMT.

 1

 This document may be cited as follows: Joint Committee on Taxation, “Present Law and 

Background Relating to the Individual Alternative Minimum Tax.” (JCX-37-05), May 20, 2005. 
2 

EXECUTIVE SUMMARY 

Present law

Present law imposes an alternative minimum tax (“AMT”) on individuals, estates, and 

trusts. In general terms, the individual AMT is a separate tax system within the individual 

income tax system that applies lower tax rates to a broader base of income. 

The AMT is the amount by which a taxpayer's “tentative minimum tax” exceeds the 

taxpayer's regular income tax for the taxable year. The tentative minimum tax is the sum of: (1) 

26 percent of so much of the “taxable excess” as does not exceed $175,000 ($87,500 in the case 

of a married individual filing a separate return) and (2) 28 percent of the remaining “taxable 

excess”. The taxable excess is the amount by which alternative minimum taxable income 

(“AMTI”) exceeds the applicable exemption amount. The exemption amounts vary based on 

filing status, and are phased out for individuals with AMTI in excess of certain levels. The 

exemption amounts and the break points for the AMT rates and exemption phaseout points are 

not indexed for inflation. 

AMTI is the taxpayer’s taxable income increased by certain preference items and 

adjusted by determining the tax treatment of certain items in a manner that negates the deferral of 

income resulting from the regular tax treatment of those items. 

Legislative background

The first comprehensive AMT was enacted in 1982. The purpose of the AMT, as stated 

in the legislative history, was to ensure that no taxpayer with substantial economic income 

should be able to avoid all tax liability by using exclusions, deductions, and credits. The AMT 

provisions enacted in 1982 are the foundation of the present-law AMT. At that time, in 

computing AMTI, the deduction for State and local taxes, the deduction for personal exemptions, 

the standard deduction, and the deduction for interest on home equity loans were not allowed, 

and the gain on incentive stock options was includible in AMTI. These remain the principal 

preferences and adjustments under present law. 

Since 1982, the rules relating to the AMT have been changed several times. These 

changes have had various effects, in some cases increasing the impact of the AMT and in other 

cases reducing the impact of the AMT.

Data and discussion

Taxpayers may be affected by the AMT in two principal ways: (1) they may have an 

AMT liability, or (2) the use of credits may be restricted because nonrefundable credits may not 

be used to reduce tax liability below that of the tentative minimum tax. It is estimated that, by 

2010, over 20 percent of individual taxpayers will be affected by the AMT. The aggregate 

amount of such effect is approximately $110 billion in additional tax liability. 

Beginning in 2006, an increasing number of middle-income taxpayers will be affected by 

the AMT. The principal reason for this increase is that, beginning in 2006, the AMT exemption 

levels revert to the levels in effect prior to 2001 and certain nonrefundable personal credits are no 
3 

longer allowed against the AMT. Even more taxpayers will be affected by the AMT in each 

passing year because exemption levels are not indexed for inflation while the regular income tax 

parameters generally are indexed for inflation.

As a separate tax system, the AMT should be analyzed as any other tax system–on the 

basis of equity, efficiency, effect on economic growth, and simplicity. In addition, the separate 

preferences and adjustments within the individual AMT should be subject to the same analysis.

To assess whether the AMT promotes overall equity depends on who bears the burden of 

the tax. There is disagreement among economists as to who bears the burden of the portions of 

the AMT relating to business activities, making assessments of the effect of the AMT more 

difficult for such taxpayers. To the extent the AMT tends to raise the average tax liability of 

higher income taxpayers, the individual AMT might increase the overall progressivity of the tax 

system. 

A tax system is efficient if it does not distort the choices that would be made in the 

absence of the tax system. No tax can be fully efficient, and thus the efficiency of the AMT is 

best judged against the regular income tax. The AMT imposes marginal tax rates on income that 

differ from those under the regular income tax. To the extent a taxpayer faces higher marginal 

rates under the AMT, the AMT would be more distortionary with respect to the individual’s 

decisions to supply labor and to save and invest. The AMT raises certain taxpayer’s marginal 

tax rates and lowers others, and thus it is not clear the extent to which the AMT induces 

additional distortions. The AMT measures certain investment income differently than the 

regular tax, possibly discouraging investment in those activities relative to other activities for 

some taxpayers. However, it is not necessarily the case that the regular tax treatment of such 

items is preferable on efficiency grounds to the AMT treatment, and thus the overall effect of the 

AMT on the efficiency of investment choices is not clear.

The AMT adds to complexity because it requires a calculation of a second income tax 

base and computation of a tax on that base. Some argue that this effect is reduced because of the 

use of tax preparation software. Some counter this by saying that a tax system should not be so 

complex as to require the use of software by many individuals. 
4 

I. PRESENT LAW AND BACKGROUND RELATING TO THE INDIVIDUAL 

ALTERNATIVE MIMIMUM TAX 

A. Present Law 

In general

An alternative minimum tax (“AMT”) is imposed on an individual, estate, or trust in an 

amount by which the tentative minimum tax exceeds the regular income tax for the taxable year. 

The tentative minimum tax is the sum of (1) 26 percent of so much of the taxable excess as does 

not exceed $175,000 ($87,500 in the case of a married individual filing a separate return) and (2) 

28 percent of the remaining taxable excess. The taxable excess is the amount by which the 

alternative minimum taxable income (“AMTI”) exceeds the exemption amount. The maximum 

tax rates on net capital gain and dividends used in computing the regular tax are used in 

computing the tentative minimum tax. AMTI is taxable income adjusted to take account of 

specified tax preferences and adjustments. 

The exemption amounts are: (1) $58,000 ($45,000 in taxable years beginning after 2005) 

in the case of married individuals filing a joint return and surviving spouses; (2) $40,250 

($33,750 in taxable years beginning after 2005) in the case of other unmarried individuals; 

(3) $29,000 ($22,500 in taxable years beginning after 2005) in the case of married individuals 

filing separate returns; and (4) $22,500 in the case of an estate or trust. The exemption amounts 

are phased out by an amount equal to 25 percent of the amount by which the individual’s AMTI 

exceeds (1) $150,000 in the case of married individuals filing a joint return and surviving 

spouses, (2) $112,500 in the case of other unmarried individuals, and (3) $75,000 in the case of 

married individuals filing separate returns or an estate or a trust. These amounts are not indexed 

for inflation. 

AMTI is the taxpayer's taxable income increased by certain preference items and adjusted 

by determining the tax treatment of certain items in a manner that negates the deferral of income 

resulting from the regular tax treatment of those 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 each 

mineral property (other than oil and gas properties) at the end of the taxable year (sec. 

57(a)(1)). 

2. The amount by which excess intangible drilling costs (i.e., expenses in excess the 

amount that would have been allowable if amortized over a 10-year period) exceed 65 

percent of the net income from oil, gas, and geothermal properties. This preference 

applies to independent producers only to the extent it reduces the producer's AMTI 

(determined without regard to this preference and the net operating loss deduction) by 

more than 40 percent (sec. 57(a)(2)). 
5 

3. Tax-exempt interest income on private activity bonds (other than qualified 501(c)(3) 

bonds) issued after August 7, 1986 (sec. 57(a)(5)). 

4. Accelerated depreciation or amortization on certain property placed in service before 

January 1, 1987 (sec. 57(a)(6)). 

5. Seven percent of the amount excluded from income under section 1202 (relating to 

gains on the sale of certain small business stock (sec. 57(a)(7)). 

In addition, losses from any tax shelter farm activity or passive activities are not taken 

into account in computing AMTI (sec. 58). 

Adjustments in computing AMTI

The adjustments that individuals must make to compute AMTI are: 

6. Depreciation on property placed in service after 1986 and before January 1, 1999, is 

computed by using the generally longer class lives prescribed by the alternative 

depreciation system of section 168(g) and either (a) the straight-line method in the 

case of property subject to the straight-line method under the regular tax or (b) the 

150-percent declining balance method in the case of other property. Depreciation on 

property placed in service after December 31, 1998, is computed by using the regular 

tax recovery periods (rather than the alternate depreciation system recovery periods) 

and the AMT methods described in the previous sentence. Depreciation on property 

acquired after September 10, 2001, which is allowed an additional allowance under 

section 168(k) for the regular tax is computed without regard to any AMT adjustments 

(sec. 56(a)(1)). 

7. Mining exploration and development costs are capitalized and amortized over a 10-

year period (sec. 56(a)(2)). 

8. Taxable income from a long-term contract (other than a home construction contract) is 

computed using the percentage of completion method of accounting. (sec. 56(a)(3)) 

9. The amortization deduction allowed for pollution control facilities placed in service 

before January 1, 1999 (generally determined using 60-month amortization for a 

portion of the cost of the facility under the regular tax), is calculated under the 

alternative depreciation system (generally, using longer class lives and the straight-line 

method). The amortization deduction allowed for pollution control facilities placed in 

service after December 31, 1998, is calculated using the regular tax recovery periods 

and the straight-line method (sec. 56(a)(5)). 

10. Miscellaneous itemized deductions2

 are not allowed (sec. 56(b)(1)(A)(i)). 

 2

 Miscellaneous itemized deductions are those deductions which are allowable for purposes of 

the regular tax only to the extent they exceed two percent of adjusted gross income. 
6 

11. Deductions for State, local, and foreign real property taxes; State and local personal 

property taxes; State, local, and foreign income, war profits, and excess profits taxes; 

and State and local sales taxes are not allowed (sec. 56(b)(1)(A)(ii)). 

12. Medical expenses are allowed only to the extent they exceed ten percent of the 

taxpayer's adjusted gross income (sec. 56(b)(1)(B)). 

13. Interest deductions on a home equity loan and on a second residence which is not a 

house, apartment, condominium, mobile home not used on a transient basis are not 

allowed (sec. 56(b)(1)(C) and (e)). 

14. The standard deduction and personal exemptions are not allowed (sec. 56(b)(1)(E)). 

15. The amount allowable as a deduction for circulation expenditures are capitalized and 

amortized over a three-year period (sec. 56(b)(2)). 

16. The amount allowable as a deduction for research and experimentation expenditures 

from passive activities are capitalized and amortized over a 10-year period (sec. 

56(b)(2)). 

17. The regular tax rules relating to incentive stock options do not apply (sec. 56(b)(3)). 

Other rules

The taxpayer's AMT net operating loss deduction cannot reduce the taxpayer's AMTI by 

more than 90 percent of the AMTI determined without the net operating loss deduction (sec. 

56(a)(4) and (d)). The taxpayer’s AMT foreign tax credit may offset the entire minimum tax 

(sec. 59(a)). 

For taxable years beginning before January 1, 2006, the nonrefundable personal credits 

(i.e., the dependent care credit, the credit for the elderly and disabled, the adoption credit, the 

child tax credit,3

 the credit for interest on certain home mortgages, the HOPE Scholarship and 

Lifetime Learning credits, the saver’s credit, and the D.C. homebuyer’s credit) are allowed to the 

extent of the entire amount of the individual’s regular tax and alternative minimum tax (sec. 26). 

For taxable years beginning after December 31, 2005, the nonrefundable personal credits 

(other than the adoption credit, child credit and saver’s credit) are allowed only to the extent that 

the individual’s regular income tax liability exceeds the individual’s tentative minimum tax, 

(determined without regard to the minimum tax foreign tax credit). The adoption credit, child 

credit, and saver’s credit are allowed to the full extent of the individual’s regular tax (reduced by 

the other nonrefundable personal credits) and alternative minimum tax (sec. 26). 

If an individual is subject to AMT in any year, the amount of tax exceeding the taxpayer's 

regular tax liability is allowed as a credit (the “AMT credit”) in any subsequent taxable year to 

the extent the taxpayer's regular tax liability exceeds his or her tentative minimum tax liability in 

 3

 A portion of the child credit may be refundable. 
7 

such subsequent year. For individuals, the AMT credit is allowed only to the extent that the 

taxpayer's AMT liability is the result of adjustments that are timing in nature. The individual 

AMT adjustments relating to itemized deductions and personal exemptions are not timing in 

nature, and no minimum tax credit is allowed with respect to these items (sec. 53).
8 

B. Legislative Background 

The Tax Equity and Fiscal Responsibility Act of 1982 enacted the first comprehensive 

individual AMT.4 According to the legislative history of that Act, “the committee has amended 

the present minimum tax provisions applying to individuals with one overriding objective: no 

taxpayer with substantial economic income should be able to avoid all tax liability by using 

exclusions, deductions, and credits.”5

 The AMT provisions enacted in 1982 are the foundation 

for the present law individual AMT. Under the 1982 Act, in computing AMTI, the deduction for 

state and local taxes, the deduction for personal exemptions, the standard deduction, and the 

deduction for interest on home equity loans and certain second residences were not allowed. 

Incentive stock option gain was included in AMTI. These remain the principal preferences and 

adjustments under present law. A rate of 20 percent applied to AMTI in excess of an exemption 

amount of $40,000 ($30,000 for unmarried taxpayers). The exemption amounts were not 

indexed for inflation, even though the regular rates were scheduled to be indexed for inflation in 

future years. Nonrefundable credits (other than the foreign tax credit) were not allowed against 

the AMT. 

The Tax Reform Act of 1986 largely retained the structure of the prior-law AMT, except 

that deferral preferences were properly adjusted over time (and a minimum tax credit was 

added). Preferences were added for interest on private activity bonds and for appreciation on 

charitable contributions (later repealed). The tax rate was increased from 20 percent to 21 

percent, and the exemption amount was phased-out for individuals with AMTI in excess of 

$150,000 ($112,500 for unmarried taxpayers). The prior-law preferences were retained. Net 

operating losses were allowed to offset only 90 percent of AMTI and the foreign tax credit was 

not allowed to reduce the tentative minimum tax by more than 90 percent. 

Since 1986, several changes have been made to the computation of the individual AMT. 

The principal changes are set forth below: 

Preferences.–The principal changes made in the determination of AMTI were to repeal 

the preference for charitable contributions of appreciated property; repeal the preference for 

percentage depletion on oil and gas wells; substantially reduce the preference for intangible 

drilling expenses; repeal the requirement that alternative depreciation lives be used in computing 

the deduction for ACRS depreciation. 

Rates.–The Omnibus Budget Reconciliation Act of 1990 increased the individual AMT 

tax rate from 21 percent to 24 percent (when the maximum regular tax rate was increased from 

28 percent to 31 percent) and the rate was further increased by the Omnibus Budget 

Reconciliation Act of 1993 to the 26- and 28-percent rate structure of present law (when the 

maximum regular tax rate was increased from 31 percent to 39.6 percent). 

 4

 An add-on minimum tax was first enacted by the Tax Reform Act of 1969. That tax was 

repealed by the 1982 Act. 

5

 Tax Equity and Fiscal Responsibility Act of 1982, S. Rpt. No. 97-494 Vol. 1, at 108 (July 12, 

1982). 
9 

The Revenue Reconciliation Act of 1997 conformed the AMT capital gain rates to the 

lower capital gain rates adopted for the regular tax. The Jobs and Growth Tax Relief 

Reconciliation Act of 2003 conformed the AMT rates for dividends to the lower rates adopted 

for the regular tax. 

Exemption amounts.–The Omnibus Budget Reconciliation Act of 1993 increased the 

AMT exemption amounts to $45,000 ($33,750 for unmarried taxpayers). The AMT exemption 

amounts were temporarily increased by the Economic Growth and Tax Relief Reconciliation Act 

of 2001 to $49,000 ($35,750 for unmarried individuals) for 2001and 2002 and further increased 

to $58,000 ($40,250 for unmarried individuals) for 2003, 2004 by the Jobs and Growth Tax 

Relief Reconciliation Act of 2003. These amounts were extended to 2005 by the Working 

Families Tax Relief Act of 2004. 

Credits.–For 1998 and subsequent years, the nonrefundable personal credits have been 

allowed on a temporary basis to offset the AMT. The last extension, through 2005, was enacted 

by the Working Families Tax Relief Act of 2004. The Economic Growth and Tax Relief 

Reconciliation Act of 2001 provided that the child tax credit, the adoption credit, and the saver’s 

credit may offset the AMT (subject to the sunset provisions of that Act). The American Jobs 

Creation Act of 2004 provided that beginning in 2005, the foreign tax credit may offset the entire 

the entire tentative minimum tax. 
10 

II. DATA AND DISCUSSION OF ISSUES 

A. Data 

Data on taxpayers affected by the AMT

A taxpayer has an alternative minimum tax liability only when his or her tentative 

minimum tax exceeds his regular tax liability. However, under present law, for taxable years 

after 2005, nonrefundable personal credits may not reduce regular tax liability below the 

tentative minimum tax. Thus, a taxpayer may be affected by the AMT without technically 

having an AMT liability if the taxpayer’s regular tax exceeds the tentative minimum tax by an 

amount that is less than the credits. In this case, the taxpayer may reduce his or her regular tax 

liability to the tentative minimum tax amount, but cannot use the full amount of credits because 

the credits cannot be use used to reduce tax liability below that of the tentative minimum tax. 

Table 1 presents projected data on individual taxpayers affected by the individual AMT.6

 

These data show that there will be a sharp increase in the number of taxpayers affected by the 

AMT in 2006. The principal reason for this increase is that, beginning in 2006, the AMT 

exemption levels revert to the levels in effect prior to 2001 and certain nonrefundable personal 

credits are no longer allowed against the AMT. The number of taxpayers affected by the AMT 

continues to rise through 2010 as a result of the fact that the AMT exemption levels are not 

indexed for inflation while the regular income tax is indexed for inflation. By 2010, over 20 

percent of individual income tax returns will have AMT liability and/or restricted use of credits 

totaling approximately $110 billion. The number of taxpayers affected by the AMT declines in 

2011 as a result of the expiration of the provisions of EGTRRA. The expiration of EGTRRA 

raises regular income tax liability and thus causes fewer taxpayers to be affected by the AMT. 

After a one-time decline in the number of taxpayers affected by the AMT in 2011, the number 

will resume rising because the AMT is not indexed for inflation. 

 6

 The tables in this pamphlet define taxpayers affected by the AMT as those who have an AMT 

liability or who have restricted use of credits as a result of the AMT. There are some other ways in which 

taxpayers can be affected by the AMT that do not show up in this definition. For example, some 

taxpayers may choose to itemize deductions, even when the standard deduction would be higher, because 

certain itemized deductions are allowed on the AMT while the standard deduction is not. Such a taxpayer 

could then have a regular tax liability in excess of their AMT liability and not show up in the tables as a 

return “affected by the AMT,” even though in the absence of the AMT they would have chosen to take 

the standard deduction in order to further reduce their tax liability. 
11 

Table 1.–Projected Individual Income Tax Returns Affected by the 

Individual Alternative Minimum Tax, 2005-2015 

Year 

Number of filed 

returns affected by 

AMT 

(millions) 

Percentage of filed 

returns affected by 

AMT 

Excess of AMT 

liability over regular 

tax liability and amount 

of restricted 

credits 

($ billions) 

2005 3.6 2.7 20.7 

2006 19.0 13.9 57.0 

2007 21.5 15.6 66.0 

2008 24.1 17.3 81.4 

2009 26.5 18.8 91.8 

2010 29.0 20.4 109.6 

2011 14.8 10.3 41.5 

2012 16.8 11.5 47.1 

2013 19.0 12.9 54.2 

2014 21.7 14.6 62.4 

2015 24.4 16.2 70.4 

Source: Joint Committee on Taxation staff estimates. 

Tables 2 and 3, below, show the projected distribution of individual taxpayers affected by 

the AMT for 2005 and 2006, respectively. While the $200,000 and over income category is 

most heavily affected by the AMT, those with the highest incomes within this category tend not 

to be affected by the AMT since most of their income is taxed at the highest rate under the 

regular income tax, 35 percent, which exceeds the rates imposed under the AMT and thus such 

taxpayers tend to have a regular tax liability that exceeds their AMT liability. 

 Tables 2 and 3 demonstrate that the individual AMT will affect an increasing number of 

middle-income taxpayers beginning in 2006. As noted above, the principal reason for this 

increase is the reversion of the AMT exemption levels to the levels in effect prior to 2001 and the 

disallowance of certain nonrefundable personal credits against the AMT. Also, while the decline 

in the AMT exemption levels will initially cause substantially more taxpayers to be affected by 

the AMT, more middle-income taxpayers will gradually be affected by the AMT with each 

passing year because the AMT exemption levels are not indexed for inflation while the regular 

income tax generally is indexed for inflation. 
12 

Table 2.–Distribution of Individual Taxpayers Affected 

by the AMT Under Present Law, 2005 

Income category (1)

Number of filed 

returns affected by 

the AMT 

(thousands) 

Taxpayers affected by 

the AMT 

as a percentage 

of all taxpayers in 

income category 

Taxpayers affected by 

the AMT 

as a percentage 

of all taxpayers 

affected by the AMT 

Less than $10,000 (2) (3) (3) 

$10,000 to less than $20,000 (2) (3) (3) 

$20,000 to less than $30,000 1 (3) (3) 

$30,000 to less than $40,000 (2) (3) (3) 

$40,000 to less than $50,000 2 (3) (3) 

$50,000 to less than $75,000 49 (3) 1.4 

$75,000 to less than $100,000 110 0.8 3.1 

$100,000 to less than $200,000 1,086 6.6 30.5 

$200,000 and over 2,316 56.4 65.0 

Total (all income categories) 3,566 2.9 100.0 

(1) The income concept used to place tax returns into income categories is adjusted gross income plus: (a) 

tax-exempt interest; (b) employer contributions to health plans and life insurance; (c) employer share of FICA tax; 

(d) workers compensation; (e) nontaxable Social Security benefits; (f) insurance value of Medicare benefits; (g) 

AMT preference items; and (h) excluded income of U.S. citizens living abroad. Categories are measured at 2005 

levels. Excludes individuals who are dependents of other taxpayers and taxpayers with negative income, resulting in 

differences with Table 1. 

 (2) Less than 500,000. 

 (3) Less than 0.5 percent 

Details may not add to totals due to rounding. 

Source: Joint Committee on Taxation staff estimates. 
13 

Table 3.–Distribution of Individual Taxpayers Affected by the AMT 

Under Present Law, 2006 

Income category(1)

Number of filed 

returns affected by 

the AMT 

(thousands) 

Taxpayers affected 

by the AMT 

as a percentage 

of all taxpayers in 

income category 

Taxpayers affected by 

the AMT 

as a percentage 

of all taxpayers 

affected by the AMT 

Less than $10,000 1 (3) (3) 

$10,000 to less than $20,000 (2) (3) (3) 

$20,000 to less than $30,000 3 (3) (3) 

$30,000 to less than $40,000 19 (3) (3) 

$40,000 to less than $50,000 146 1.1 .8 

$50,000 to less than $75,000 981 4.2 5.2 

$75,000 to less than $100,000 2,693 18.4 14.2 

$100,000 to less than $200,000 11,349 62.6 59.9 

$200,000 and over 3,763 84.1 19.9 

Total (all income categories) 18,955 15.1 100.0 

(1) Same income concept as used in Table 2, measured at 2006 levels. Excludes individuals who are 

dependents of other taxpayers and taxpayers with negative income, resulting in differences with Table 1. 

 (2) Less than 500,000. 

 (3) Less than 0.5 percent. 

Details may not add due to rounding. 

Source: Joint Committee on Taxation staff estimates. 
14 

Table 4, below, shows the characteristics of returns affected by the AMT, while Table 5, 

below, shows the effect that various proposals would have on the number of taxpayers affected 

by the AMT. The two tables together show that the primary reason taxpayers are affected by the 

AMT is the differing treatment of the State and local tax deduction and the personal exemptions 

for the AMT tax base as compared to the regular income tax base. Table 5 also shows that 

extending the higher exemption level for the AMT in effect in 2005 to 2006 would reduce the 

returns affected by the AMT from 19 million to just over 5 million. 

Table 4.–Characteristics of Tax Returns Affected by the AMT, 2006 

Returns with: Percentage of all AMT Returns 

Personal exemptions 100.0 

Itemized deduction for State and local taxes 81.2 

Reduced nonrefundable credits 24.3 

Miscellaneous itemized deductions 21.4 

Standard deduction 18.1 

Passive gain or loss 2.8 

All other preferences 3.4 

Source: Joint Committee on Taxation staff estimates.

Table 5.–Projected Individual Income Tax Returns Affected 

by the AMT Under Various Proposals, 2006 

Proposal: Returns affected by AMT 2006 

(millions) 

Retain present law 19.0 

Extend higher AMT exemption levels through 2006 5.1 

Extend nonrefundable personal credits through 2006 17.8 

Allow personal exemptions against the AMT 5.4 

Allow State and local tax deduction in the AMT 8.4 

Allow standard deduction in the AMT 14.9 

Source: Joint Committee on Taxation staff estimates. 
15 

B. Discussion of Issues 

In general

The individual AMT is a separate tax system within the individual income tax system that 

applies lower tax rates to a broader base of income. As a separate tax system, the AMT should 

be analyzed in terms of equity, efficiency, growth, and simplicity. In addition, the separate 

preferences and adjustments within the individual AMT should be subject to the same analysis. 

Equity

The AMT results in a higher tax liability for certain taxpayers than would be the case if 

only the regular income tax applied. This occurs if: (1) the taxpayer's tentative minimum tax 

exceeds his or her regular tax liability; or (2) the use of tax credits allowed under the regular tax 

is limited by the taxpayer's tentative minimum tax. To the extent that taxpayers who appear to 

have the ability to pay taxes do pay taxes as a result of the AMT, some observers conclude that 

the AMT increases the perceived fairness of the income tax system. 

Indeed, the rationale for enacting the original individual minimum tax in 1969 and 

revising it in 1982 and 1986 was the perception that some taxpayers were able to avoid paying 

tax on relatively large incomes. Minimum tax legislation targeted those deductions, exemptions, 

exclusions, accounting methods, and tax credits that were considered to have contributed to such 

results. Some of the enacted AMT preferences and adjustments relate to business or investment 

income (e.g., the depreciation adjustment and the tax-exempt private activity bond preference) 

while others relate to regular-tax items that are more personal in nature (e.g., the denial of 

personal exemptions and certain itemized deductions). 

To assess whether the AMT promotes the overall equity of the tax system, it is necessary 

to look beyond who remits tax payments to the Federal Treasury to who bears the burden of the 

AMT. While economists generally believe that income taxes on wages are borne by taxpayers 

who supply labor, there is disagreement concerning the incidence 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 generally believe that businesses do not bear the burden 

of taxes (including the individual AMT), but rather individuals bear the burden of the tax. There 

is disagreement, however, over which individuals bear 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 returns on investment, or some combination 

of these individuals. To the extent that individuals affected by the AMT have business-related 

income, the uncertainty regarding the incidence of income taxes on the returns to capital make it 

difficult 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 

amount of the affected taxpayer's tax liability as a percentage of his or her income. At the 

individual level, higher-income taxpayers are more likely to be AMT taxpayers than are lowerincome taxpayers (see Table 2 above). If the burden of the taxes were to rest with the affected 

taxpayers, the individual AMT might increase the overall progressivity of the income tax system. 
16 

Some analysts argue that the AMT promotes horizontal equity by taxing more equally 

taxpayers who have the same economic capacity but choose to engage in different patterns of 

tax-favored activities. Other analysts note that in a market economy, investment by taxpayers 

would be expected to equalize risk-adjusted, after-tax returns. As a consequence, the prices of 

tax-favored investments would be bid up (or their quantity increase) and the prices of taxdisfavored investments would fall (or their quantity decrease). In equilibrium, the pre-tax returns 

of tax-favored and tax-disfavored investments would differ, but their after-tax returns would be 

the same. For example, tax-exempt bonds trade at interest rates lower than otherwise 

comparable taxable bonds. This is because the tax-exempt borrower does not have to offer as 

great an interest rate to the lender to provide the lender with a competitive after-tax return. If 

after-tax returns equilibrate, analysts may question whether a horizontal inequity existed prior to 

the enactment of the AMT. 

The AMT also raises equity issues with respect to preference items that are personal in 

nature. For example, some believe that it is fair that families with multiple dependents pay less 

tax than families with fewer dependents and support the regular-tax allowance of personal 

exemptions and child credits to further this goal. The AMT, in disallowing these exemptions and 

credits, may frustrate this view of fairness. 

Efficiency and growth

A tax system is efficient if it does not distort the choices that would be made in the 

absence of the tax system. However, no tax system can be fully efficient. Whether the AMT 

contributes to the efficiency of the United States’ tax system depends on the extent to which it 

reduces other inefficiencies in the tax system and the extent to which it creates new 

inefficiencies. As an income tax, the AMT reduces the after-tax compensation from working 

(labor income is taxed) and saving (investment income is taxed). Thus, the AMT may distort 

decisions to supply labor and capital. The size of the marginal tax rate is one of the primary 

determinants of the size of any distortion created.7

 However, the degree of additional distortion, 

if any, created by the AMT depends upon the tax rates of the AMT compared to those of the 

regular income tax. In this regard, it is useful to distinguish the effect on labor income from the 

effect on investment income. 

The measurement of labor income is nearly identical under the regular income tax and the 

AMT. The two differences arise in the measurement of income from certain incentive stock 

options and the measurement of net labor income when the taxpayer incurs expenses categorized 

as miscellaneous itemized deductions. If labor income is measured identically under the regular 

income tax and the AMT, then any distortions in labor supply are altered if a taxpayer subject to 

the AMT has a different marginal tax rate under the AMT than he or she would have under the 

regular tax. The AMT has statutory marginal tax rates of 26 or 28 percent. However, those with 

alternative minimum taxable income in the phaseout range of the exemption level ($150,000 to 

 7

 For a more detailed discussion of marginal tax rates and possible distortions of labor supply and 

saving under an income tax, see Joint Committee on Taxation, Overview of Present Law and Economic 

Analysis Relating to Marginal Tax Rates and the President’s Individual Income Tax Rate Proposal (JCX6-01), March 6, 2001. 
17 

$382,000 for married taxpayers filing jointly and $112,500 to $273,500 for unmarried 

individuals) will have an effective marginal tax rate of 33 and 35 percent respectively. In 

general, for 2005, taxpayers affected by the AMT are likely to have statutory regular tax rates in 

the 25 to 35 percent range,8

 and thus in general it may be the case that taxpayers affected by the 

AMT generally do not experience a marginal tax rate that is much different than they would have 

faced on the regular tax. To the extent this is true, the AMT is not likely to have a significant 

impact on labor supply distortions relative to the regular income tax. Under present law, 

however, over time many more lower-income taxpayers with regular income tax rates of 15 

percent will be affected by the AMT, causing their marginal tax rate to rise to at least 26 percent, 

thus likely exacerbating labor supply distortions. 

In the two cases where labor income is measured differently under the regular income tax 

and the AMT, the AMT may increase the rate of tax on such forms of labor income, thereby 

seemingly increasing distortions in labor supply. However, by discouraging taxpayers from 

structuring their compensation to receive tax-favored remuneration, efficiency may be increased. 

A caveat to this discussion is warranted. For the AMT to mitigate or exacerbate a 

distortion under the regular tax, the taxpayer must know that he or she will be subject to the 

AMT. If a taxpayer is uncertain whether the tax rates of the AMT or the regular tax will apply, it 

is difficult to assess the taxpayer’s behavioral response. In general, if a taxpayer subject to the 

AMT views himself or herself as only temporarily subject to the AMT, he or she is less likely to 

view the AMT tax rates as the relevant tax rates upon which to plan labor supply decisions. 

The same general analysis of comparing the possible distorting effects of the difference 

in marginal tax rates under the regular income tax and the AMT applies to taxpayer’s decisions 

to save (to supply capital) in response to tax rates on investment income. There are several more 

cases where investment income is measured differently under the AMT than under the regular 

income tax than was the case with the measurement of labor income. By discouraging 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 or investments, but rather 

limits which taxpayers may take full advantage of the tax-favored treatment provided by the 

regular income tax. In addition, limiting which taxpayers can profitably undertake tax-favored 

activities could lead to more efficient investors finding the activity unprofitable, while less 

efficient investors find the activity profitable. Moreover, some tax-favored activities may be 

permitted as part of the regular income tax as a way to reduce some other inefficiency in the 

economy. These arguments might suggest that efficiency could be better improved by changes 

in the regular income taxes. The aggregate effect of the AMT on the efficient allocation of 

capital across various investment opportunities may be modest. Since the Taxpayer Relief Act 

of 1997 conformed depreciation recovery periods for both the regular income tax and the AMT, 

the number of investment opportunities on which the income might subject a taxpayer to the 

 8

 Taxpayers paying under the regular tax are also often subject to various phaseouts of credits, 

deductions, and other benefits that raise effective marginal tax rates above these statutory rates. See, for 

example, Joint Committee on Taxation, Present Law and Analysis Relating to Individual Effective 

Marginal Tax Rates (JCS-3-98), February 3, 1998. 
18 

AMT rather than the regular tax has been modest in comparison to aggregate investment in the 

United States. 

Because of the increasing number of taxpayers subject to the AMT, there is another 

avenue by which the AMT may affect the level of investment in the United States and thereby 

affect economic growth. By increasing average tax rates (the total tax paid by certain taxpayers), 

the AMT may reduce the cash flow of potential investors. If, as some analysts believe, investors' 

cash flows are important to investment decisions, the AMT may reduce aggregate investment. 

Further, the effect of the AMT on effective marginal tax rates, and thereby on the cost of capital, 

may change the incentive to undertake marginal investment projects and thereby affect the level 

of aggregate investment. 

It is generally conceded that in measuring economic income, deductions should be 

allowed for expenses incurred in the production of income. However, the AMT disallows the 

deduction of miscellaneous itemized deductions–including un-reimbursed employee business 

expenses and investment expenses that relate to the production of income. The disallowance of 

such deductions may lead to inefficiencies as taxpayers may be discouraged from certain 

otherwise profitable investments or activities or encouraged to rearrange their affairs to secure 

AMT deductions 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 on 

that base, so the present tax system, with an AMT, is not as simple to administer or comply with 

as would be the same system without an AMT. However, some might argue that the availability 

and widespread use of tax preparation software substantially reduces the compliance burdens of 

the AMT. Others argue that a tax system should not be so complex as to effectively require the 

use of software or paid return preparers to prepare returns. 

 As detailed above, relatively few taxpayers currently are subject to the AMT. However, 

this observation understates the extent to which the AMT imposes a compliance burden on 

taxpayers. Many taxpayers must undertake the AMT calculation to determine whether, in fact, 

they are liable or whether the utilization of certain credits is limited. There are no studies that 

specifically measure compliance costs arising from the individual AMT. Table 1, above, 

indicates that many more individuals will become affected by the AMT in the future. 

In order to reduce the burden of the individual alternative minimum tax, the tax could be 

amended in a number of ways. The exemption amounts could be indexed or increased so as to 

reduce the number of individuals subject to the AMT; the deduction for personal exemptions and 

the standard deduction could be allowed in computing AMTI; the minimum tax rates could be 

reduced; the phaseout of the minimum tax exemption could be eliminated, the nonrefundable 

personal credits could be allowed to offset the minimum tax after 2005; or the alternative 

minimum tax could be repealed.