The AMT provides for an alternative tax calculation on a broader tax base than theregular tax. Individuals add back a variety of provisions including not only business provisions but certain itemized deductions (mainly state and local taxes, some medicalexpenses and miscellaneous deductions), the standard deduction, and personal exemptions. After an exemption of $45,000 for joint returns and $33,750 for single returns, the first$175,000 is taxed at 26% and the remainder is taxed at 28%. Exemptions are phased out. Theindividual compares AMT liability and regular tax liability and pays the higher one. Whilethe AMT base is broader than the regular tax base, there are many provisions that are notincluded in its base, notably the benefits of lower capital gains tax rates and the exclusion fortax exempt bonds, and the itemized deduction for home mortgage interest. Indeed, theelimination of the capital gains exclusion in 1986 caused a significant contraction in thenumber of taxpayers subject to the AMT; the current rate preferences are not part of the AMT. Credits are automatically included in the base (i.e., effectively disallowed), although underprovisions adopted as part of H.R. 1836 , this rule does not apply to the mostimportant credit, the child credit. (1) However, unlike the rest of the income tax, the AMT exemptions are not indexed to inflation. The result has been an increase in the number of taxpayers who are covered by theAMT. (2) In 1987, about 140,000 returns paid the AMT, constituting 1/10 of one percent of allreturns filed. This number was below the 4/10 of a percent of returns that paid the tax in 1984and fell largely because the deduction for capital gains was eliminated by the 1986 tax act andtherefore automatically affected coverage under the AMT. Inflation, however, took its toll. By 1999, the AMT covered 823,000 returns, constituting 6/10 of a percent of all returns filed,an increase in percentage share of 600% between 1987 and 1999. This effect occurred eventhough the exemptions were increased in 1990. More growth is ahead, however. In 2009, the Joint Tax Committee projects that over 9 million taxpayers will pay the AMT, constituting 6.3% of all tax returns filed, an increase inpercentage share of over a thousand percent from 1990 to 2009. The AMT would probablyconstitute a larger share of joint returns filed, since incomes are higher for these returns thanfor single returns. The AMT would also constitute a larger portion of returns with tax liability;since typically about a quarter of returns filed pay no tax, taxpayers on the AMT wouldconstitute over 8% of returns with tax payments. Another 6 million returns would have been subject to limits on tax credits, such as the child credit and education credits enacted in 1997;this surge in the AMT coverage would have occurred in large part in 2002, but H.R. 1836 made the most important credit (the child credit) permanently availaleunder the AMT. While the AMT will still be concentrated among higher income individuals, it will gradually reach further down into the income distribution. This shift in the distribution isshown in Table 1. Note that this table understates the coverage of the AMT and its reach intothe middle income classes, because it does not include those taxpayers whose credits are stilllimited by the AMT (such as education tax credits). But it does illustrate how the failure toindex exemptions will substantially expand the AMT. As this table illustrates, the shift of exposure to the AMT from the very highest income classes to the middle and upper middle income classes is dramatic over time even withoutthe tax cuts in H.R. 1836 . In 1998, almost half of AMT taxpayers fell into the1.6% of tax-filers with adjusted income over $200,000; and over three-quarters fell into thetop 8% of taxpayers who had income over $100,000. In 2008, less than 15% of AMTtaxpayers have incomes over $200,000 and about half have incomes of $100,000 or more. Moreover, these effects occur despite the fact that taxpayers in these income classes areaccounting for a larger share of total taxpayers as incomes rise over time. Table 1: Percentage Distribution of AMT Taxpayers by Income Class (Excluding the Effects of Limits on Credits), Prior to H.R.1836 Source: Data from and CRS calculations based on data from Joint Committee on Taxation. A comparison of the fraction of taxpayers on the AMT in each income bracket shows a similar dramatic shift. While the shares increase in all of the middle and upper brackets, thedramatic changes are in the middle income brackets. For example, the share of taxpayers onthe AMT at income between $75,000 and $100,000, which most people would consider in themiddle class would increase from 1% to 20%. These effects understate the shift of the influence of the AMT toward the middle classthat is expected in the future because they do not include the interaction with the tax creditsthat were adopted in 1997. Under the AMT provisions, credits are limited to the excess ofregular tax over AMT liability except for the child credit which is now specifically excluded. For 2008, there would have been another 6 million returns that are constrained by the taxcredit; however, most of these will probably no longer be affected because they reflect effectsof the child credit. The Treasury Department recently completed a study of the AMT that showed a significant growth in the share of AMT taxpayers, inclusive of the effects of the credit. (3) Table2 shows these effects for 2000, 2005. and 2010. Overall, 15.7% of taxpayers will be coveredby the AMT in 2010, and the shares rise to as much as 64%. These numbers will be smallerafter considering the effects of H.R. 1836 , because of the adjustment in thecredit, but larger because of the lower rates and other tax cut provisions. Table 2: Percentage Distribution of AMT Taxpayers by Income Class (Including the Effects of Limits on Credits), Prior to H.R.1836 a - greater than 75% b - less than 0.05% Source: Treasury Department The cost of correcting the AMT is significant. According to data from the Joint Committee on Taxation, indexing AMT exemptions would cost $13.9 billion by 2008. Thiscost would be larger in the wake of the recent tax changes. Eliminating the credit limitprovision would cost about $1 billion currently, but would cost many billions of dollars by2008 or 2009. Eliminating the credit limit provision and adding standard deductions wouldcost the U.S. Treasury $26 billion by 2009 and $96 billion for the period 1999-2009. (4) According to the Treasury study AMT tax liability was projected projected to rise from $6.4billion in 2001 to $38.2 billion in 2010 before considering H.R. 1836 , with atotal amount of $182 billion over the ten year period. This number will now be higher dueto the rate reductions and marriage penalty provisions in H.R. 1836 . Clearly, the AMT will become increasingly important in the years to come, in the number of taxpayers covered and revenue cost of altering the AMT. And any tax cut thatreduces regular tax liabilities and does not also alter the AMT will interact with the AMT intwo ways: it will increase the number of taxpayers on the AMT and the number affected bythe credit limit, and it will cause some or all of the tax cut not to be received by certainfamilies. Tax provisions that are aimed at reducing taxes for joint returns may particularly interact with the AMT because married couples have a greater number of dependents, which increasesthe likelihood that taxpayers will be under the AMT. Married couples also tend to havehigher incomes and, while their AMT exemptions are also higher, may be more likely to beaffected by the AMT. The interaction is also affected by how the tax change is distributedacross the income classes, since only joint returns with more than $45,000 of taxable incomeare potentially subject to the AMT. Treasury data show that 21% of joint returns will beaffected by the AMT in 2010, compared to 15.7% for the overall taxpaying population. Forjoint returns with dependents, the share affected by the AMT rises to 39%. Thus, tax cutsdirected at joint returns are particularly likely to be restricted due to the AMT. A marriage penalty arises for some families because family income is combined andsubject to progressive tax rates. Since the standard deductions and rate brackets, while largerthan those of singles, are not twice as large, marriage can cause the loss of standarddeductions and cause some income to be taxed at higher rates. Other couples, however,experience bonuses; this outcome tends to arise when earnings are relatively unequal or whenthere is only one earner, because the exemption amounts and rate brackets are larger for thejoint returns filed by married couples than for singles' returns. H.R. 1836 proposed to address the marriage penalty for most taxpayers, granting bonuses to many taxpayers who formerly had penalties and expanding the bonusesof those with bonuses. (5) About 60% of joint returns are in the 15% bracket and would have any penalties that did exist eliminated (and bonuses increased) merely through increasing the standard deductionto twice that of single returns. Under H.R. 6 , a stand alone marriage penalty billpassed earlier this year by the House, this provision was estimated to cost $6.3 billion by2009.