The House Republican leadership and the Trump Administration want to repeal the state and local tax (SALT) deduction and the individual Alternative Minimum Tax (AMT). But as policymakers consider the combined proposal, they should be careful about the sometimes-surprising ways they interact with one another.

AMT repeal, which has widespread support on Capitol Hill, would primarily benefit high-income households. Over 5 million households pay more each year in individual income tax due to the AMT, the vast majority with annual income over $200,000. 

While repealing the SALT deduction largely would impact high-income taxpayers in high-tax states, my colleague Howard Gleckman explains that the politics are not as simple as often portrayed. Neither are the economics.

The relationship between the two provisions is complicated. For example, some high-income AMT taxpayers may not face a tax increase from repealing the SALT deduction. State and local taxes are not deductible under the AMT, a major reason why taxpayers pay the alternative tax. And some AMT taxpayers will find their situation little changed by repeal of the SALT deduction.

Yet surprisingly, repealing the SALT deduction would increase taxes for about 85 percent of AMT taxpayers. The simple reason is that their regular tax without the SALT deduction would be higher than their AMT. Thus, most AMT taxpayers in fact benefit from the SALT deduction even though they cannot claim it under the AMT (and so may not realize that the deduction benefits them).

The AMT adds a few thousand dollars to the tax bill of most AMT taxpayers. Repealing the SALT deduction would increase taxes far more for many of them. Indeed, about 75 percent of those now on the AMT taxpayers would pay higher taxes than under current law if both the SALT deduction and the AMT were repealed.

This is another example where the AMT interacts with other parts of the tax code in a counter-intuitive way.