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Alternative Minimum Tax: What is the AMT?

Congress originally enacted the individual alternative minimum tax (AMT) in 1969 to guarantee that high-income individuals paid at least a minimal amount of tax. After calculating their regular income tax, middle- and upper-income taxpayers must add a number of "preference items" to their taxable income, subtract a special AMT exemption, and recalculate their tax according to the AMT tax schedule. If the tax under that schedule is higher than the regular income tax, taxpayers pay the difference as AMT.

 

  • The AMT will affect just over 4 million taxpayers in 2011, but the number will explode to over 31 million in 2012 unless the temporarily higher AMT exemption is extended (see table).
    AMT-Table1-AMT-Exemption-Levels
    AMT-Table1-AMT-Exemption-Levels
  • The AMT has two tax rates: the first $175,000 of income above the exemption is taxed at a 26-percent rate, and incomes above that amount are taxed at 28 percent. The AMT exemption phases out beginning at $112,500 for singles and heads of household, $150,000 for married couples filing joint returns, and $75,000 for married couples filing separate returns. Since the exemption phases out at a 25-percent rate, it creates effective AMT tax rates of 32.5 percent (125 percent of 26 percent) and 35 percent (125 percent of 28 percent).
  • The AMT disallows state and local tax deductions and dependent exemptions. Those two adjustments account for nearly 80 percent of the difference between the AMT and the regular income tax (Figure 1). As a consequence, middle-income families with children who live in high-tax states are among those most likely to owe AMT.
    AMT Graph 1 Top Five Preferences
    Underlying Data: Download
    AMT Graph 1 Top Five Preferences
  • Because the AMT is not indexed for inflation, the number of AMT taxpayers grows every year under current law. The 2001-06 tax cuts roughly doubled the size of the problem by cutting the regular income tax without a corresponding long-term fix to the AMT.
  • Without Congressional action, the number of taxpayers subject to the AMT will drop after the tax cuts expire, from 31 million in 2012 to 21 million in 2013. But the lack of inflation indexing in the AMT will continue to push that number inexorably back upward (see Figure 2).
  • AMT Graph 2 Projected Number
    Underlying Data: Download
    AMT Graph 2 Projected Number
  • Repealing or fixing the AMT would be expensive. If all of the temporary provisions that were extended in 2010 expire in 2013 as scheduled, the AMT will increase tax revenues by $1.4 trillion between 2013 and 2022. Extending all of the temporary provisions without adjusting the exemption would nearly double that amount to more than $2.5 trillion. In contrast, extending the temporary tax provisions and indexing the 2011 AMT exemption for inflation would slash AMT revenue to just $670 billion over the next decade.

For the latest data and analysis on the AMT, see www.taxpolicycenter.org/taxtopics/AMT.cfm

 
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