ALTERNATIVE

MINIMUM TAX

An Overview of Its

Rationale and Impact

on Individual

Taxpayers

United States General Accounting Office

GAO Report to the Chairman, Committee on

Finance, U.S. Senate

August 2000

GAO/GGD-00-180

United States General Accounting Office General Government Division

Washington, D.C. 20548

Page 1 GAO/GGD-00-180 Rationale and Impact of AMT

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August 15, 2000

The Honorable William V. Roth, Jr.

Chairman, Committee on Finance

United States Senate

Dear Mr. Chairman:

This report responds to your request for a nontechnical primer on the

alternative minimum tax (AMT) for individuals, which is intended to help

ensure that high-income individuals do not avoid significant tax liability. In

general, AMT is a separate tax system that parallels the regular individual

income tax system. Under this dual system of taxation, taxpayers are

required to first compute their tax liability under regular income tax rules

and then, if their income or tax payments do not meet certain tests, they

are required to recompute their tax liability using the AMT rules.

Taxpayers are then obligated to pay the greater of the two.

Although relatively few taxpayers have been affected financially by AMT in

the past, recent research at the Department of the Treasury estimated that

about 17 million taxpayers would pay additional taxes under AMT by 2010.

Given your concerns about the complexity of the AMT rules and the fact

that many more taxpayers would be affected, you asked us to provide a

report summarizing

• the rationale for establishing AMT,

• how AMT affects taxpayers’ tax liability,

• the expected increase in AMT coverage and additional tax liability and the

major reasons for the increase, and

• the impact of the projected increase in AMT coverage on taxpayers’

compliance burden and economic incentives and on the distribution of the

tax burden.

As agreed with your office, this report is based on our review of the AMT

tax law provisions, legislative history, and materials published by tax law

experts in both the private sector and federal government. We did our

work in Washington, D.C., during June and July 2000 in accordance with

generally accepted government auditing standards.
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Page 2 GAO/GGD-00-180 Rationale and Impact of AMT

AMT was created to reduce the ability of individuals to escape payment of

tax on income by using tax preferences (e.g., items excluded from income

subject to tax) available under the regular tax system. A type of minimum

tax was first enacted in 1969, following congressional testimony by the

Secretary of the Treasury reporting that 155 high-income individuals paid

no federal income tax in 1966. Over the intervening years, the minimum

tax has been amended a number of times, producing today’s AMT. The

legislative history for AMT indicates that as Congress amended the law,

the overriding objective remained constant.

AMT can affect taxpayers’ tax liability in two ways: (1) directly, by

imposing an AMT liability that exceeds their regular tax liability, or (2)

indirectly, by reducing the amount of certain tax credits allowable under

the regular income tax. After calculating their taxes under the regular

income tax, many taxpayers must complete a series of forms and

calculations to determine if they are affected by AMT. If this exercise

shows that they may be affected by AMT, taxpayers must recalculate their

taxable income and tax liability using rules that differ from the regular

income tax. To date, recent research at the Joint Committee on Taxation

(JCT) and Treasury has indicated that AMT has affected relatively few,

mostly higher-income, taxpayers and has generated a relatively small

amount of tax liability in addition to the regular income tax. According to

the research at Treasury, for example, AMT is expected to affect about 1.3

million taxpayers—about 1.3 percent of all taxable returns—and generate

a projected $5.8 billion in additional tax liability in 2000.

According to the research at JCT and Treasury, however, the number of

taxpayers affected by AMT and the corresponding tax liability generated

are expected to increase substantially over the next 10 years. For example,

according to the research at Treasury, the number of taxpayers affected

financially by AMT is expected to increase from about 1.3 million in 2000

to 17 million in 2010—almost 16 percent of all taxable returns—and the

additional tax liability generated by AMT is projected to grow from $5.8

billion to $38.2 billion during the same period. Of the projected 17 million

taxpayers affected by AMT in 2010, about 4.5 million are expected to have

reduced tax credits due to AMT, even though they are not projected to

have a direct AMT liability.

The projected increases in AMT coverage and additional tax liability are

primarily attributable to the following: (1) unlike the regular tax system,

the AMT system is not indexed to account for inflation and (2) the

legislation that excludes personal tax credits from AMT rules will expire in

2001. According to research at Treasury, the annual effects of these two

Results in Brief
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Page 3 GAO/GGD-00-180 Rationale and Impact of AMT

AMT features are expected to have increasing budgetary significance in

future years. In 2010, AMT’s lack of inflation adjustments and limitation of

personal credits (beginning in 2002) are estimated to account for about $24

billion and about $7 billion in additional tax revenues, respectively.

The projected increase in AMT coverage and the complexity of the system

would significantly add to the overall compliance burden on taxpayers and

the administrative burden on the Internal Revenue Service (IRS). AMT’s

projected increase would also affect the distribution of taxes among

individuals. On the one hand, AMT generates taxes from some higherincome individuals who would otherwise have paid no taxes. On the other

hand, it is projected to shift from affecting mostly higher-income

individuals to more middle-income taxpayers between 2000 and 2010 and

may also affect certain economic incentives created by the regular tax

system. Additionally, changes that reduce taxes under the regular tax

system, absent corresponding changes to AMT, may result in an increase in

the number of individuals covered by AMT and thus partially neutralize the

benefits of the tax changes.

We provided copies of a draft of this report to the Secretary of the

Treasury and Commissioner of Internal Revenue for comment. Those

comments are discussed at the end of this letter and mostly involve

technical clarifications. Additionally, Treasury officials suggested that our

report be refocused to emphasize “design” or “structural flaws” of AMT

features and to analyze the extent to which the features fulfill AMT’s

purpose. Developing data sufficient to make judgments such as these was

outside the scope of our review, which was to provide a primer (i.e., a brief

introduction) on AMT, including a summary of its rationale and impact on

taxpayers.

In 1969, Congress enacted an add-on minimum tax that served as the

predecessor to the current AMT. It was designed to reduce the ability of

higher income individuals to escape payment of tax on income. Its

enactment followed congressional testimony by the Secretary of the

Treasury reporting that 155 individuals, each with adjusted gross incomes

(AGI) above $200,000 (about $1.1 million in fiscal year 2000 dollars) as

defined under the regular tax system, paid no federal income tax in 1966.

Since 1969, the minimum tax has been amended a number of times, most

notably in 1976, 1978, 1982, 1986, 1990, and 1993. Through these

amendments, the minimum tax was changed from essentially a surcharge

on certain tax preference items (i.e., items excluded from taxable income

under the regular tax but taxable under the minimum tax) to a separate tax

AMT Was Designed to

Increase the

Likelihood That Higher

Income Taxpayers

Have Some Tax

Liability
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Page 4 GAO/GGD-00-180 Rationale and Impact of AMT

system, paralleling the regular income tax, with its own definition of

income subject to tax and its own tax rates.

In general, the changes were enacted to help ensure that all taxpayers with

significant amounts of income pay at least a minimum amount of tax. For

example, the Senate report for the Tax Reform Act of 1986 emphasized

that the overriding objective of the change was to ensure that no taxpayer

with substantial income should be able to avoid significant tax liability by

using tax preferences available under the regular tax system.1

AMT may affect taxpayers’ tax liability in two ways: (1) directly, by

imposing an AMT liability that exceeds their regular tax liability, or (2)

indirectly, by reducing the amount of tax credits allowable under the

regular income tax. To date, AMT has affected relatively few, principally

higher income, individuals and has generated a small percentage of tax

liability in addition to the regular income tax.

In general, AMT is a separate tax system that parallels the regular

individual income tax system. It generates an alternative tax liability by

applying different tax rates to a broader base of income than under the

regular individual income tax system and limits the use of certain tax

credits available under the regular income tax. As illustrated in figure 1,

taxpayers complete a series of steps to determine if they are affected by

AMT.2 In general, they calculate their regular tax liability and complete a

preliminary AMT worksheet. Then if so indicated by that worksheet, they

calculate their AMT liability, compare the two tax liabilities, and pay the

greater of the two.

1

See S. Rept. No. 313, 99th Cong., 2d sess., p. 520.

2

This illustration generally applies to individual taxpayers required to file IRS Form 1040, U.S.

Individual Income Tax Return.

AMT Affects

Taxpayers’ Tax

Liability in Two Ways

AMT Structure and Rules

Differ From the Regular

Income Tax
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Exclusions and deductions for AGI

Standard or itemized deductions

Personal exemptions

Regular taxable income

Regular tax rates

Regular tax liability (before credits)

Tax credits

Regular tax liability

Step 1: Calculate Regular Tax Liability

Income

No Yes

Does AMT apply?

Otherwise, complete preliminary 

AMT worksheet.

Go to

Step 3.

Step 2: Determine If AMT Applies

Stop and pay

regular tax.

If claiming tax credits that are

limited by AMT, go directly to

Step 3 .

If claiming certain exclusions or

deductions that require adjustments

under AMT rules go directly to Step 3.

Calculate AMT Liability

Personal exemptions

Standard or AMT adjusted

itemized deductions

AMT adjustments and preferences

AMT exemption

AMT taxable income

AMT tax rates

AMT liability

Regular taxable income

Step 3:

Pay AMT amount 

less allowable

tax credits.

Pay regular tax

less allowable

tax credits.

Step 4: Compare Tax Liabilities

No Yes

Is AMT > regular tax,

(before tax credits)?

A

Source: GAO analysis.

Figure 1: Simplified Illustration of Regular Income Tax and AMT
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As the first step in the process, taxpayers calculate their tax liability based

on their taxable income under the regular income tax. To determine

taxable income, taxpayers report various items of income3

and then

• subtract items for determining AGI,4

• subtract the standard or itemized deductions,5and

• subtract personal exemptions.6

Next, taxpayers determine their regular tax liability by applying the

appropriate tax rate to this taxable income amount. The regular individual

income tax has five marginal tax rates: 15 percent, 28 percent, 31 percent,

36 percent, and 39.6 percent for tax year 1999.7 The regular income tax also

provides special tax rates for long-term capital gains.

Finally, taxpayers may reduce their regular tax liability with certain tax

credits. The AMT rules, however, may limit the use of some credits. Under

current law, taxpayers generally may not use certain tax credits, most

notably the general business credit, to reduce their regular tax liability to

an amount less than their AMT. For such taxpayers, AMT serves as a floor

for the regular income tax below which allowable credits are disallowed

but may be carried over to another tax year. Taxpayers with credits limited

by AMT are required to go to step 3 in figure 1, bypassing step 2, in order to

determine the extent to which AMT limits apply.

Under current law, personal tax credits, such as the child and education

credits, are temporarily excluded from the AMT rules through 2001.8

3

While generally all income is subject to tax, some types of income are excluded, such as interest on

tax-exempt bonds.

4

Deductions for determining AGI are certain items that are specifically exempt or excluded from gross

income by statute, such as the deduction for IRA contributions, moving expenses, and alimony.

5

In 1999, the standard deduction was $4,300 for single filers; $6,350 for heads of household; $7,200 for

married, filing jointly; $3,600 for married, filing separately.

6

Personal exemptions are based on the number of dependents claimed by a taxpayer. In 1999, personal

exemptions were $2,750 for each qualifying exemption, subject to phase-outs based on taxpayer

income.

7

The marginal tax rates under the regular income tax are applied to amounts of taxable income that

depend on filing status. E.g., the tax for married taxpayers filing jointly is 15 percent of the first $43,050

in taxable income; $6,458 plus 28 percent of taxable income between $43,050 and$104,050; $23,358 plus

31 percent of taxable income between $104,050 and $158,550; $40,433 plus 36 percent of taxable

income between $158,550 and $283,150; and $85,289 plus 39.6 percent of taxable income over $283,150.

8

The Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1998 allowed

taxpayers to claim their personal credits—including the child and education credits—in full against

First, Taxpayers Calculate Their

Regular Tax Liability
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Page 7 GAO/GGD-00-180 Rationale and Impact of AMT

Beginning in 2002, though, these personal credits would be limited by

AMT.

As the second step, taxpayers determine whether they may be subject to

AMT as follows.

• Taxpayers that claim certain AMT preference items under the regular

income tax that are considered AMT adjustments or preferences are

automatically subject to the AMT rules and are to proceed directly to step

3—calculate AMT liability.9

• Other taxpayers are to complete a worksheet that contains a series of

income tests designed to determine whether a taxpayer’s income exceeds

a preliminary threshold according to the basic AMT rules.10 If the

worksheet shows that their income exceeds the threshold, taxpayers must

continue to step 3—calculate AMT liability. If the worksheet shows that

their income does not exceed the threshold, taxpayers pay their regular

tax liability without having to complete steps 3 and 4 in figure 1.

As the third step, taxpayers subject to AMT compute their AMT liability

using the AMT form,11 which requires them to recalculate their taxable

income and tax liability using rules that differ from the regular income tax.

To calculate taxable income under AMT, taxpayers essentially start with

the taxable income amount reported under the regular system and then do

the following.

• Add back their personal exemptions that were allowed under the

regular income tax.

• Add back the standard or certain AMT-adjusted itemized

deductions that were allowed under the regular income tax. AMT

requires taxpayers to adjust certain itemized deductions taken under the

regular income tax. For example, AMT disallows the deduction for state

and local taxes and only allows for the deduction of medical expenses

their AMT liability for the single tax year beginning after December 31, 1997. The Ticket to Work and

Work Incentives Improvement Act of 1999 extended that provision through 2001.

9

Appendix I identifies the items that automatically subject taxpayers to the AMT rules in step 2 of

figure 1.

10The worksheet is provided in the instructions to IRS forms 1040 and 1040A.

11The AMT form is IRS Form 6251, the Alternative Minimum Tax-Individuals. This form, when

necessary, is to be attached to IRS Form 1040, U.S. Individual Income Tax Return.

Second, Taxpayers Determine

Whether AMT Applies

Third, Some Taxpayers

Calculate AMT Liability
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Page 8 GAO/GGD-00-180 Rationale and Impact of AMT

above 10 percent of AGI.12 However, AMT does not disallow or adjust all

itemized deductions. For example, AMT does not require taxpayers to add

back certain mortgage interest or charitable contribution deductions to

their taxable income. (See app. I for more details.)

• Add other AMT adjustments and preference items taken under the

regular income tax. AMT disallows certain preference items and requires

adjustments to other deductions available under the regular income tax,

including some income excluded from the regular income tax. Many of

these items are related to timing of deductions allowed for certain types of

business investments. In effect, the elimination or adjustment of certain

preference items expands the base of taxable income under AMT. (For a

summary of AMT preference items and adjustments, see app. I.)

• Subtract the AMT exemption amount based on filing status. The

AMT exemption amount, which is subject to phase-out depending on

taxpayer income computed under AMT rules, is generally intended to

replace the personal exemptions and the standard deduction allowed

under the regular income tax. However, the AMT exemption amount is not

adjusted to account for family size. For example, married taxpayers filing

jointly may reduce the AMT taxable income by $45,000. The $45,000

exemption amount is subject to a phase-out of 25 percent of AMT taxable

income in excess of $150,000.13

• Taxpayers then calculate their AMT liability by applying the AMT

tax rates to their AMT taxable income. The AMT applies a 26-percent

tax rate on the first $175,000 of AMT taxable income and 28 percent of

such income in excess of $175,000.14

As the fourth step, taxpayers essentially compare their regular tax liability

(before credits) with their AMT liability, as shown in step 4 of figure 1. In

general, if their AMT liability is greater than their regular tax liability

(before credits), they must pay their AMT liability less any allowable

credits. If their AMT liability is less than their regular tax liability (before

12Under the regular income tax, deductions are allowed for medical expenses in excess of 7.5 percent

of AGI.

13The AMT exemption for single and head of household filers is $33,750, subject to a phase-out of 25

percent for taxable income in excess of $112,500. The AMT exemption amount for married individuals

filing separately is $22,500, subject to a phase-out of 25 percent of taxable income in excess of $75,000.

14For married taxpayers filing separately, AMT applies the 26-percent tax rate to the first $87,500 of

AMT taxable income and the 28-percent rate on the excess. AMT also has special rules for taxing

capital gains income, which generally preserves the lower capital gains tax rates of the regular tax

system (e.g., 20-percent tax rate).

Fourth, Taxpayers Compare Tax

Liabilities and Check the Use of

Certain Tax Credits
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Page 9 GAO/GGD-00-180 Rationale and Impact of AMT

credits), they pay their regular tax liability less any allowable credits.15 As

we described earlier, the AMT rules temporarily allow taxpayers to use

personal credits without limitation. However, taxpayers generally may not

use general business credits to reduce their regular tax liability to an

amount less than their tax liability computed under the AMT rules. Also,

taxpayers whose AMT liability exceeds their regular tax liability may not

use certain refundable tax credits (e.g., the earned income tax credit) to

reduce their AMT liability to an amount less than their tax liability

computed under the regular tax.

The following example depicts how AMT limits general business credits. A

taxpayer has a regular tax liability (before credits) of $5,000, qualifies for

$1,500 in general business credits, and has an AMT liability of $4,000. The

taxpayer does not have a direct AMT liability, but can only take $1,000 in

general business credits and not the other $500 because the taxpayer

cannot use credits to reduce the regular tax liability below the AMT tax

liability. As a result, the taxpayer’s effective tax liability of $4,000 is $500

greater than it would have been absent AMT.

According to recent research at JCT and Treasury, AMT currently affects

relatively few taxpayers and generates a relatively small portion of

additional tax liability.16 However, it does require some taxpayers with

income to remit more in tax than they would otherwise under the regular

tax. For example, recent research at Treasury estimated that AMT would

affect about 1.3 million taxpayers—about 1.3 percent of all taxable

returns—and would generate about $5.8 billion in additional tax liability in

2000. As shown in table 1, most of the affected taxpayers, both in terms of

the number affected and percentage of AMT taxes paid, have been higher

income individuals, as measured under the regular tax system.

Additionally, according to recent IRS calculations, about 14,000 taxpayers

15The foreign tax credit can also be deducted from AMT. But it may not reduce AMT by more than 90

percent. Additionally, taxpayers may be able to use part of their AMT liability, if applicable, to offset

their regular tax liability in the following year. Commonly referred to as the “AMT credit,” this credit is

subject to restrictive conditions, and few taxpayers are eligible for it.

16For reporting purposes, we used data estimates from recent research conducted at the Department of

the Treasury’s Office of Tax Analysis. See Robert Rebelein and Jerry Tempalski, Who Pays the

Individual AMT?, Office of Tax Analysis Working Paper 87 (June 2000). All estimates in this paper were

made using the Treasury Department’s Individual Tax Model in combination with the administration’s

economic forecast from the FY 2001 Budget. This working paper notes that the views expressed in the

paper do not necessarily represent official Treasury positions. Accordingly, we limited our use of the

paper to the data produced by the Treasury models and refer to the working paper as recent research

at Treasury. Also, JCT provided us with updated tables from its report, Present Law and Background

Relating to the Marriage Tax Penalty, Education Tax Incentives, the Alternative Minimum Tax, and

Expiring Tax Provisions (JCX-39-99).

AMT Currently Affects

Relatively Few Taxpayers
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Page 10 GAO/GGD-00-180 Rationale and Impact of AMT

would not have had any individual income tax liability absent AMT in tax

year 1997.

Adjusted gross income

Number of

AMT taxpayersa

Percentage of AMT

tax liability

Less than $0b c 0.8

$0-$14,999 c0.1

$15,000–$29,999 c0.2

$30,000–$49,999 c 0.4

$50,000–$74,999 0.1 2.2

$75,000–$99,999 0.2 6.5

$100,000–$199,999 0.5 22.5

$200,000 or more 0.5 67.4

Total 1.3 100.0

Note: Totals may not sum because of rounding.

a

In millions.

b

An AGI less than 0 can occur due to a loss of some kind, such as a business loss.

c

Less than 50,000.

Source: Department of the Treasury, Office of Tax Analysis Working Paper 87 (June 2000).

According to recent research at JCT and Treasury, AMT coverage and tax

liability are projected to increase dramatically between 2000 and 2010. For

example, recent research at Treasury estimated that the number of

taxpayers affected financially by AMT is projected to grow at an average

rate of 31 percent per year after 2000, and by 2010, AMT is expected to

affect almost 16 percent of all taxable returns and generate about $38

billion in additional tax liability. The expected increases are primarily

attributable to the fact that, unlike the regular income tax, AMT is not

indexed to account for inflation and that the legislation that excludes

personal tax credits from the AMT rules is set to expire in 2001.

Recent research at Treasury indicated that the number of taxpayers

affected by AMT under current law is projected to expand from about 1.3

million in 2000 to about 17 million in 2010—a 31-percent average increase

per year. The corresponding additional AMT liability is projected to

increase from about $5.8 billion to about $38.2 billion from 2000 to 2010—a

21-percent average increase per year.

The projected increase in the number of taxpayers affected financially by

AMT under current law include both those with direct AMT liabilities and

those with reduced tax credits due to AMT. The number of individuals with

a direct AMT liability is projected to increase from 1.2 million in 2000 to

Table 1: Projected AMT Taxpayers and

Tax Liability in 2000

AMT Coverage and Tax

Liability Are Projected

to Increase

Extent of AMT Coverage

and Tax Liability Increases
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12.5 million in 2010.17 In addition, the number of individuals with reduced

tax credits due to AMT is projected to increase from 100,000 in 2000 to 4.5

million in 2010, even though they are not projected to have a direct AMT

liability.

The additional tax liability generated by AMT is projected to increase

rapidly from both taxpayers with a direct AMT liability and those with

reduced credits due to AMT. The additional tax liability generated from

individuals with direct AMT liabilities is projected to increase from $3.4

billion in 2000 to $26.4 billion in 2010. The additional tax liability generated

from individuals with credits lost due to AMT is projected to increase from

$2.4 billion in 2000 to $11.8 billion in 2010.

The projected increases for the individual AMT are attributable to the fact

that, unlike the regular income tax, the AMT parameters are not indexed to

account for inflation. Additionally, the expiration of legislation that

excludes personal credits from the AMT rules contributes to the projected

increase in AMT coverage and additional tax liability.

In the regular income tax system, the personal exemptions, standard

deduction, and tax rate brackets are indexed for inflation. Under AMT,

however, the exemption amounts, the threshold phase-out amounts for

these exemption amounts, and the AMT rate brackets are not indexed for

inflation.

The lack of inflation indexing in AMT causes taxpayers’ AMT liabilities to

increase faster than their regular tax liabilities. Real income growth—

growth above inflation—will increase both regular tax and AMT liabilities.

However, income growth due to inflation will generally not increase

regular tax liabilities because of inflation indexing, but it will increase

AMT liabilities. The result is that, over time, more taxpayers will have an

AMT liability that exceeds their regular tax liability, even if inflation

continues to remain relatively low, as it has over the past few years.

Another contributing factor to the projected increases in AMT is the

expiration in 2001 of the legislation that Congress enacted to temporarily

exclude personal credits from limitation under the AMT rules. As we

described earlier, personal tax credits are to be subject to limitation under

the AMT rules beginning in 2002. Recent research at Treasury estimated

that the number of taxpayers with reduced credits would increase from

17Of the estimated 12.5 million taxpayers with a direct AMT liability in 2010, 4.9 million are also

projected to have reduced tax credits.

Increased AMT Coverage

Primarily Attributable to the

Absence of Inflation

Adjustments and Expiration

of Personal Tax Credit

Exclusion
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200,000 in 2001 (the last year of the personal credits exclusion) to 2 million

in 2002 and would rise to 9.4 million in 2010. According to JCT, the

recently enacted child and education credits are expected to be affected

the most.18

If the AMT parameters were indexed to account for inflation starting in

2000, according to recent research at Treasury (illustrated in fig. 2), the

projected number of taxpayers affected financially by AMT over time

would be relatively constant and significantly less than under current law.19

The number of individuals affected by an inflation-adjusted AMT is

estimated at 2.1 million in 2010 compared to 17 million under current law.

This projected reduction is expected to occur for both taxpayers with a

direct AMT liability and those with reduced credits. Also, if Congress

permanently extended the legislation excluding personal tax credits from

the AMT rules, the projected number of taxpayers affected financially by

AMT and the corresponding revenue generated would also be lower than

under current law.20 As figure 2 shows, recent research at Treasury

estimated that under this scenario, about 13.4 million taxpayers would be

affected by AMT in 2010 compared to 17 million under current law.

18The Child Credit, the HOPE education credit, and the Lifetime Learning Credit are provisions of the

regular income tax that were enacted in the Taxpayer Relief Act of 1997.

19Under this scenario, personal tax credits would be limited by the AMT rules beginning in 2002.

20This scenario does not include inflation adjustments for the AMT parameters.

Slower Growth Projected

Under an AMT That Is

Adjusted for Inflation and

That Does Not Limit Tax

Credits
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Note: This figure contains a combination of actual and projected data. Pre-1998 data on the number

of taxpayers are actual values, the 1998 data have both actual and projected components, and the

1999-2010 data are all projections.

Source: Department of the Treasury, Office of Tax Analysis Working Paper 87 (June 2000).

As figure 3 shows, the recent research at Treasury also indicated that

indexing AMT to account for inflation and permanently excluding personal

credits from limitation under the AMT rules would have a significant

budgetary impact over time. The projected additional revenues for an

inflation-adjusted AMT (both direct payments and reduced credits) are

expected to grow at a slower rate and account for an amount significantly

less than projected under current law—about $24 billion less in 2010. The

projected additional revenue generated by AMT with personal credits

permanently excluded would be $6.7 billion less than the $38.2 billion

projected under current law in 2010.

Figure 2: Actual and Projected Number of Taxpayers Affected Financially by AMT
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Note: This figure contains a combination of actual and projected data. Pre-1998 tax liabilities are

actual values, the 1998 tax liability has both actual and projected component, and the 1999-2010 tax

liabilities are all projections.

Source: Department of the Treasury, Office of Tax Analysis Working Paper 87 (June 2000).

The projected increase in AMT coverage, coupled with the system’s

complexity, would add significantly to the overall compliance burden on

taxpayers and the administrative burden on IRS. The projected increases

would also affect the distribution of the tax burden among taxpayers and

may change the economic incentives created by the tax system.

Additionally, under current law, AMT could neutralize future changes to

the regular tax system.

Figure 3: Actual and Projected Additional Tax Liability From AMT

Increased AMT

Coverage Would Have

a Number of Impacts
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As the projected number of individuals affected by the complex AMT rules

increases over time, the overall compliance burden of the tax system on

taxpayers will increase. While it is difficult to concretely measure

compliance burden, there is common agreement that AMT can

significantly complicate the filing situation for taxpayers. The National

Taxpayer Advocate ranks AMT as one of the most burdensome areas of

tax law.21 Additionally, in a recently released report on tax law

complexity,22 IRS states that the complex calculations and extensive

linkages between forms and worksheets (as illustrated in fig. 1) associated

with AMT impose a substantial burden on taxpayers. Taxpayers often bear

this burden only to determine that they do not have an AMT liability.

According to IRS, of the 4.4 million taxpayers that filed the AMT form, only

20 percent of them were affected financially by AMT in tax year 1997.

Another indicator of AMT complexity is that 93 percent of the 4.4 million

AMT filers used paid preparers in 1997 compared to about 52 percent of all

individuals.23

A significant portion of AMT compliance burden is attributable to the

complexity of the AMT rules. As we described earlier, AMT is a parallel tax

to the regular income tax. As such, AMT requires taxpayers to compute

their regular tax liability and then recompute their AMT liability using a

different base of income, different exemptions, and different tax rates.

AMT applies different treatments to certain income deductions,

exclusions, and credits that may be used by taxpayers under the regular

income tax. As a result, affected taxpayers are required to apply two

methods of accounting to some of these items–one for the regular tax and

one for AMT. The complexity of the system can lead to uncertainty for

taxpayers. For example, the withholding system on wages—the principal

system used by individual taxpayers to deposit funds with IRS to cover

their tax bill—is based on income and exemptions as defined by the

regular tax system, not AMT.

IRS has identified a number of AMT provisions that add to complexity.

These provisions include

• special rules for allowing portions of prior-year AMT tax payments to

offset future-year regular tax liability under certain conditions,

21FY 1999 National Taxpayer Advocate’s Annual Report to Congress, IRS Publication 2104 (Rev.12-99).

22Annual Report from the Commissioner of the Internal Revenue Service on Tax Law Complexity (June

2000), pp. 19-29.

23According to IRS, it is not clear whether the AMT filers used paid preparers specifically because of

AMT.

Increased AMT Coverage

Would Affect Taxpayers’

Compliance Burden
B-285738

Page 16 GAO/GGD-00-180 Rationale and Impact of AMT

• recalculations of depreciation expenses under AMT rules that differ from

the regular tax, and

• additional calculations for married taxpayers who consider filing

separately in order to determine the appropriate amount of tax liability.

According to IRS and Treasury officials, the complexity of calculating AMT

liability can be most problematic for married taxpayers who consider filing

separately. AMT, like the regular tax, establishes procedures that are

intended to minimize or eliminate that ability of some taxpayers to allocate

income arbitrarily between spouses to reduce their tax liability. If married

taxpayers were to follow all recommended procedures, they would have to

compute their taxes four different ways. First, they would need to compute

their regular tax as if they were filing jointly and then again as if filing

separately. Then they would need to determine their AMT tax as if filing

jointly and then again as if they were filing separately. From these

computations, the taxpayers could then determine which filing method is

most appropriate for them.

The complexity of AMT and increases in the number of taxpayers affected

also would complicate IRS’ efforts to administer the federal tax system.

Despite the frequent involvement of paid preparers in filing AMT returns,

administering AMT does not just involve annually processing over 4

million AMT returns and crediting taxpayer accounts with the payments.

According to IRS, it responded to about 6,400 calls from taxpayers about

AMT issues in 1999 and dealt with errors on about 10 percent of taxpayer

returns with a direct AMT liability.

Moreover, according to IRS, AMT is not an add-on to the existing tax

system that involves just computer-checking calculations on a return.

Some aspects can only be verified through office or field audit. According

to IRS, the frontline employees who do such verification work consistently

rank AMT as one of the most complex provisions with which they deal.

The increase in AMT coverage would affect how the tax burden is

distributed among taxpayers. On the one hand, AMT requires some

taxpayers with income to remit more in tax than they otherwise would

under the regular tax. As already discussed, about 14,000 taxpayers would

not have had any individual income tax liability without the AMT in tax

year 1997. On the other hand, as shown in table 2, recent research at

Treasury indicated that AMT coverage, absent any legislative change, will

shift from mostly higher income taxpayers in 2000 to increasingly more

middle-income taxpayers by 2010.

Increased AMT Coverage

Would Affect IRS

Administration

Increased AMT Coverage

Would Affect Distribution of

Tax Burden
B-285738

Page 17 GAO/GGD-00-180 Rationale and Impact of AMT

2000 2010

Adjusted gross incomea

Number

of AMT

taxpayersb

Percentage of

all taxable

returns

AMT

liabilityc

Percentage

of total AMT

liability

Number

of AMT

taxpayersb

Percentage

of all taxable

returns

AMT

liabilityc

Percentage

of total AMT

liability

Less than $0 d e g0.8 d e0.1 0.2

$0-$14,999 d0.1 g0.1 d f g f

$15,000-$29,999 d f g 0.2 0.1 0.7 0.1 0.2

$30,000-$49,999 d 0.2 g 0.4 2.1 8.5 1.7 4.6

$50,000-$74,999 0.1 0.6 0.1 2.2 4.5 24.3 5.5 14.5

$75,000-$99,999 0.2 2.3 0.4 6.5 3.3 32.1 6.0 15.7

$100,000-$199,999 0.5 5.7 1.3 22.5 5.6 44.8 14.3 37.5

$200,000 or more 0.5 20.8 3.9 67.4 1.4 45.2 10.4 27.3

Totals or overall

percentages of taxpayers 1.3 1.3 5.8 100.0 17.0 15.7 38.2 100.0

Note: Totals may not sum because of rounding.

a

In constant dollars.

b

In millions, including reduced tax credits.

c

In billions, including reduced tax credits.

d

Less than 50,000 taxpayers.

e

Greater than 75 percent.

f

Less than 0.05 percent.

g

Less than $50,000

Source: Department of the Treasury, Office of Tax Analysis Working Paper 87 (June 2000).

The recent research at Treasury provided additional insight into the shift in

the classes of taxpayers affected by AMT. In 2000, the projected taxpayers

affected by AMT are more likely to be higher income families with many

dependents. By 2010, increasingly more middle-income, moderately-sized

families are expected to be affected by AMT. For example, the percentage

of taxpayers affected by AMT with incomes between $50,000 and $75,000

and 4 personal exemptions is projected to increase from about 1 percent in

2000 to 32 percent in 2010. The primary reason for this change is that for

middle-income taxpayers, personal exemptions are projected to be the

largest and most common items to be added back into taxable income

under AMT in 2010.

Additionally, the state of a taxpayer’s residence also affects AMT coverage.

The projections indicate that taxpayers living in states with high taxes are

more likely to be affected by AMT than those in states with low taxes. The

apparent driving factor for this change is that state and local taxes are

projected to amount to about one-half of the total preference items that

are added back into the taxable income for computing AMT tax liability in

2010.

Table 2: Distribution of Taxpayers Financially Affected by AMT and the Additional Tax Liability Generated
B-285738

Page 18 GAO/GGD-00-180 Rationale and Impact of AMT

Through its different definition of taxable income and tax rate structure,

AMT may affect the economic incentives created by the regular income

tax.24 If AMT coverage increases over the next 10 years as projected, more

taxpayers will face those affected incentives. Two examples follow.

According to JCT, AMT adjustments, preference items, and credit

limitations may reduce incentives for taxpayers to undertake certain

investments and activities that are favored under the regular tax. For

example, unincorporated business owners’ incentives to invest may be

reduced because AMT rules regarding depreciation are less generous than

under the regular tax. If education credits become limited by AMT because

the moratorium on the use of personal credits expires, taxpayers may have

less incentive to pursue educational opportunities that qualify for these

credits.

Additionally, the current 26- and 28-percent tax rates under AMT are

generally lower than the tax rates a taxpayer faces under the regular tax.

Lower marginal tax rates—the additional tax owed from earning an

additional dollar of income—decrease the disincentives taxpayers face to

work additional hours or invest additional amounts.

The extent to which the incentives and disincentives affected by AMT lead

to changes in taxpayer behavior and changes in overall economic

performance is uncertain. For example, while AMT reduces incentives for

some taxpayers to undertake certain investments and activities favored

under the regular tax, it does not affect incentives for all taxpayers. As a

result, AMT might affect which taxpayers undertake tax-favored activities,

but might not greatly affect the total amount of tax-favored activity

undertaken in the economy overall.

AMT, in its current form, could partially neutralize the impact of future

legislative changes to the regular income tax system. As we mentioned

previously, AMT is a parallel system to the regular income tax, but unlike

the latter, it is not indexed for inflation. Thus, the impacts of any attempts

to alter the regular income tax, such as cutting tax rates or adding new

credits, absent corresponding changes to AMT, could be counteracted

either directly or indirectly by AMT. For example, congressional proposals

that would reduce taxable income in the regular income tax (such as

24For discussions of the effects of AMT on economic efficiency, see Joint Committee on Taxation,

Present Law and Issues Relating to the Individual Alternative Minimum Tax (“AMT”) (JCX-3-98), Feb.

2, 1998, and Michael J. Graetz and Emil Sunley, “Minimum Taxes and Comprehensive Tax Reform,” in

Henry J. Aaron, Harvey Galper, and Joseph A. Pechman, eds., Uneasy Compromise: Problems of a

Hybrid Income-Consumption Tax (Washington, D.C.: The Brookings Institution, 1988).

Increased AMT Coverage

May Affect Economic

Incentives

AMT Could Partially

Neutralize Future Changes

to the Regular Tax System
B-285738

Page 19 GAO/GGD-00-180 Rationale and Impact of AMT

marriage tax penalty relief), but do not include corresponding

modifications to the AMT rules, might benefit some individuals, but might

also increase the number of individuals covered by AMT.

On July 25, 2000, we provided a draft of this report for comment to the

Secretary of the Treasury and the Commissioner of Internal Revenue. In

lieu of written comments, officials from IRS’ Offices of Chief Counsel and

Strategic Studies verbally advised us that they agreed with the general

description of AMT and suggested some technical clarifications, which we

have incorporated into the report. On August 9, 2000, Treasury’s Office of

Tax Analysis (OTA) provided written comments on a draft of this report

(see app. II). OTA officials suggested that our report be refocused to

emphasize the “design” or “structural flaws” of AMT features and to

analyze the extent to which the features fulfill AMT’s purpose. To make

such changes would require us to have developed extensive data sufficient

to draw conclusions on whether or not AMT features are “design or

structural flaws” and whether those features, in operation, fulfill AMT’s

purpose. Developing such data was outside the scope of our review, which

was to provide a primer (i.e., a brief introduction) on AMT, including an

overview of its rationale and impact on taxpayers. The Treasury officials

also suggested a number of technical clarifications that we incorporated as

appropriate.

As agreed with your office, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days from the

date of this letter. At that time, we will send copies to Senator Daniel

Patrick Moynihan, Ranking Minority Member of your Committee;

Representative Bill Archer, Chairman, and Representative Charles B.

Rangel, Ranking Minority Member, House Committee on Ways and Means;

the Honorable Lawrence H. Summers, Secretary of the Treasury; and the

Honorable Charles O. Rossotti, Commissioner of Internal Revenue. We will

also make copies available to others upon request.

Agency Comments
B-285738

Page 20 GAO/GGD-00-180 Rationale and Impact of AMT

Key contributors to this report are acknowledged in appendix III. If you

have any questions, please contact me or Thomas M. Richards on (202)

512-9110.

Sincerely yours,

James R. White

Director, Tax Policy

and Administration Issues
Page 21 GAO/GGD-00-180 Rationale and Impact of AMT
Page 22 GAO/GGD-00-180 Rationale and Impact of AMT

Contents

1 Letter

Appendix I 24

Summary of Tax

Provisions Affected by

AMT Rules

Appendix II 26

Comments From the

Department of the

Treasury

Appendix III 31

GAO Contacts and

Staff

Acknowledgments

Table 1: Projected AMT Taxpayers and Tax Liability in

2000

10

Table 2: Distribution of Taxpayers Financially Affected

by AMT and the Additional Tax Liability Generated

17

Tables

Figure 1: Simplified Illustration of Regular Income Tax

and AMT

5

Figure 2: Actual and Projected Number of Taxpayers

Affected Financially by AMT

13

Figure 3: Actual and Projected Additional Tax Liability

From AMT

14

Figures

Abbreviations

AMT alternative minimum tax

IRS Internal Revenue Service

JCT Joint Committee on Taxation
Page 23 GAO/GGD-00-180 Rationale and Impact of AMT
Appendix I

Summary of Tax Provisions Affected by AMT

Rules

Page 24 GAO/GGD-00-180 Rationale and Impact of AMT

Tax provision General treatment under regular tax General treatment under AMT

Preferences under the AMT rules

Percentage depletionaDeduction equal to prescribed percent of

gross income, subject to certain limitations

Excess of deduction for percentage depletion over the

adjusted basis of depletable property is added to AMTI.

Preference does not apply to oil and gas properties.

Intangible drilling costsaDeductible currently Amount by which excess intangible drilling costs

exceed 65 percent of net income is included in AMTI.

Excess intangible drilling costs are the amount that

regular tax deductions exceed 10-year amortization.

Preference does not apply to independent producers to

extent AMTI is reduced by 40 percent or less ignoring

the tax preference.

Private activity bond interest

incomea

Not included in income Included in income if bonds issued after August 7,

1986, except for qualified section 501(c)(3) bonds

issued for charitable organizations.

Depreciation or amortization on

pre-1987 propertya

ACRS depreciation allowed Excess of regular tax depreciation over straight-line

depreciation added to alternative minimum taxable

income (AMTI)

Section 1202 exclusion for certain

small business stocka

50 percent of gain on sale of stock of

certain small businesses excluded from

income

42 percent of the gain excluded from regular tax is

included in AMTI.

Adjustments under the AMT rules

Standard deduction Fixed amount deductible, depending on

filing status. Amounts are indexed for

inflation

Disallowed

Itemized deductionsb

State and local property (real and

personal) and income taxes

Fully deductible Disallowed

Medical expenses Allowed to the extent that they exceed 7.5

percent of a taxpayers AGI

Allowed to the extent that they exceed 10 percent of a

taxpayers AGI

Miscellaneous expenses Deductible to the extent total exceeds 2

percent of AGI

Disallowed

Home mortgage interesta, Qualified residence interest, including

interest on home equity loans, is deductible

(subject to certain limits)

Qualified housing interest is deductible; interest on a

home mortgage not used to buy, build, or improve a

home is not deductible

Investment interest expensea Deductible to the extent of investment

income

Difference between interest deduction for regular tax

and interest deduction calculated under AMT rules is

added to AMTI (can be positive or negative)

State income tax refund Included in taxable income if deducted in

previous year

Deducted if included in calculation of regular taxable

income

Personal exemptions Fixed amount per dependent is deducted

from income. Amount is indexed for

inflation and subject to phase-outs based

on taxpayer income

Disallowed

Depreciation of post-1986 property

(real and personal)a

Accelerated cost recovery system using

prescribed recovery periods and 200%

declining balance method for 3, 5, 7, and

10 year classes

Depreciation is recalculated and difference between

regular tax depreciation and AMT depreciation is

added to AMTI. For property placed in service after

1986 and before 1/1/99, alternative depreciation

system class lives (generally longer) and 150%

declining balance method (generally slower) is used.

For property placed in service after 12/31/98, regular

tax lives are used.
Appendix I

Summary of Tax Provisions Affected by AMT Rules

Page 25 GAO/GGD-00-180 Rationale and Impact of AMT

Tax provision General treatment under regular tax General treatment under AMT

Mining exploration and development

costsa

Deductible currently 10-year amortization

Amortization deduction for pollution

control facilitiesa

60-month amortization Amortization is recalculated and the difference

between regular tax depreciation and AMT

depreciation is added to AMTI. For facilities placed in

service before 1/1/99, alternative depreciation system

(generally longer lives and straight-line method) is

used. For facilities placed in service after 12/31/98,

regular tax lives and straight-line method is used.

Circulation expendituresaDeductible currently 3-year amortization

Research and experimental

expendituresa

Certain expenditures deductible currently 10-year amortization

Incentive stock optionsaNo income on the exercise of option; option

price is basis for future gain or loss

Income on exercise equal to excess of fair market

value over option price; fair market value is basis for

future gain or loss

Adjusted gain or loss Gain or loss on sale of asset calculated

using regular tax basis

Gain or loss calculated using AMT basis

Losses Deductibility limited by at-risk and passive

activity loss rules

Losses from tax shelter farm or passive activities are

limited

Net operating loss deductiona Can offset 100 percent of taxable income Limited to 90 percent of alternative taxable income

Foreign tax credit Can offset 100 percent of tax liability on

foreign source income

Limited to 90 percent of pre-credit AMT liability

calculated without regard to net operating losses

Earned income credit Refundable–credit claimed can exceed

regular tax liability

Reduced by the amount the taxpayers tentative

minimum tax exceeds regular tax liability

General business credit Combination of a number of tax credits;

cannot reduce current-year regular tax

below 25 percent of net regular tax liability

that exceeds $25,000

Cannot reduce regular tax liability below tentative AMT

liability

AMT credit Prior-year AMT liability from deferral

adjustments and preferences can be

claimed

Prior-year AMT liability cannot reduce current-year

AMT liability

a

Use of this tax provision automatically requires a taxpayer to compute an AMT tax liability as

depicted in Step 2 of the AMT process (see fig. 1 on p. 5). The worksheet also instructs taxpayers

with AMT adjustments from an estate, trust, electing large partnership or a cooperative to complete

the AMT form.

b

Certain itemized deductions are subject to phase-outs based on taxpayer income.

Source: GAO analysis of Internal Revenue Code.
Appendix II

Comments From the Department of the

Treasury

Page 26 GAO/GGD-00-180 Rationale and Impact of AMT

See p. 19.

See comment 2.

See p. 19

See p. 11.

See comment 1.

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.
Appendix II

Comments From the Department of the Treasury

Page 27 GAO/GGD-00-180 Rationale and Impact of AMT

See comment 4.

See comment 3.

See comment 5.

See comment 6.
Appendix II

Comments From the Department of the Treasury

Page 28 GAO/GGD-00-180 Rationale and Impact of AMT

See comment 7.
Appendix II

Comments From the Department of the Treasury

Page 29 GAO/GGD-00-180 Rationale and Impact of AMT

The following are GAO’s comments on the August 9, 2000, letter from the

Department of the Treasury’s Office of Tax Analysis (OTA).

1. OTA’s letter included an enclosure containing technical comments. We

did not reproduce the enclosure, but we incorporated the technical

comments as appropriate.

2. As OTA suggested, we expanded the discussion of AMT for married

taxpayers to include a description of the rationale for limitations on

taxpayers filing separately under both the regular tax and AMT.

3. OTA suggested that our description of the steps that taxpayers must

undertake to determine their regular tax and AMT liabilities are more

complicated than we describe. It also stated that taxpayers do not actually

compare the difference between their regular tax liability (before most

credits) and their tentative AMT and pay the higher of the two. However,

later on in its letter, OTA states that “On the AMT form, tentative minimum

tax is compared with a taxpayer’s regular tax liability (before most credits)

to determine the additional tax liability.” As OTA suggested, taxpayers

calculate their regular tax liability, calculate their tentative AMT, and if

their tentative AMT liability is greater, they add the difference to their

regular tax liability and pay this amount. In effect, this amount is equal to

their tentative AMT and, as such, taxpayers are paying the greater of their

regular tax and AMT as we described. While we provided a generalized

description of this process, it is essentially the same as OTA described, and

they agreed that “the tax paid is exactly the same as described in GAO’s

report.” Given that the purpose of the report is to provide a primer (i.e., a

brief introduction) on AMT, we made no adjustment.

4. OTA commented that OTA Working Paper 87 (June 2000), which we

used as a source for data estimates on the impact of AMT, should not be

referred to as a Treasury study or Treasury research. OTA made this

comment because the views expressed in the report do not necessarily

represent the views of the Treasury Department as indicated by a

disclaimer printed on the report. During the course of our review,

responsible OTA officials assured us that we could refer to the data

published in the OTA Working Paper as “recent research by Treasury.”

This was possible because all estimates contained in the report were made

using the Treasury Department’s Individual Tax Model in combination with

the administration’s economic forecast from the fiscal year 2001 budget.

Accordingly, we cited the data from the report but not the views expressed

by the authors. Thus, we believe that it is appropriate to characterize the

working paper’s data estimates as Treasury research. However, in

GAO’s Comments
Appendix II

Comments From the Department of the Treasury

Page 30 GAO/GGD-00-180 Rationale and Impact of AMT

response to OTA’s written comments, we revised the report to clearly

acknowledge the disclaimer and refer to the estimates as “recent research

at Treasury.”

5. As suggested by OTA, the report was revised to distinguish more clearly

between AMT liability and revenue where appropriate.

6. OTA commented that we should describe the liability from the AMT tax

calculation as the tentative AMT and indicate that the AMT liability is the

difference between the tentative AMT and the regular tax. This comment

is essentially the same comment as we discussed in comment 3. As we

explained in comment 3, the bottomline of these calculations is that

taxpayers are liable for paying the greater of the tax computed under the

AMT rules or the regular tax rules. Given that our report provides a

generalized description of AMT, we made no adjustment, that is, we refer

to the tax computed under AMT rules as an AMT liability.

7. As OTA suggested, we adjusted line 8 of table 2 to account for the

collapsing of data into one stratum.
Appendix III

GAO Contacts and Staff Acknowledgments

Page 31 GAO/GGD-00-180 Rationale and Impact of AMT

James R. White, (202) 512-9110

Thomas M. Richards, (202) 512-9110

In addition to those named above, Daniel Lynch, Ed Nannenhorn, Anne

Stevens, and Cheryl Peterson made key contributions to this report.

GAO Contacts

Acknowledgments
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