Tax Policy
Center
Urban Institute
And
Brookings Institution
The Individual Alternative
Minimum Tax
President’s Advisory Panel on
Federal Tax Reform
3 March 2005
Leonard E. Burman
Senior Fellow, The Urban Institute
Codirector, The Tax Policy Center
Visiting Professor, Georgetown Public Policy Institute
www.taxpolicycenter.org
Background
Tax Policy
Center
Urban Institute
And
Brookings Institution
• 1966: 155 high-income taxpayers paid no
income tax
• 1969: creation of a minimum tax designed to
ensure high income filers did not exploit tax
laws to reduce or eliminate their federal income
tax liability
• 2010: AMT will affect 30 million taxpayers,
including virtually all upper middle class
families with two or more kids.
www.taxpolicycenter.org
Determination of AMT Liability
Tax Policy
Center
Urban Institute
And
Brookings Institution
• Add preferences and adjustments to
taxable income
• Subtract AMT exemption
• Calculate tax using AMT rate schedule
and rules
• If more than regular tax, pay the
difference as AMT
• (Many complexities left out of this
simplified explanation.)
www.taxpolicycenter.org
AMT Exemptions and Schedule
Tax Policy
Center
Urban Institute
And
Brookings Institution
• AMT exemption currently $58,000 for
couples, $40,250 for singles
– In 2006, exemption drops to
$45,000/$33,750
• Exemption phases out at higher
incomes, creating high implicit tax rates
• Statutory rates = 26% and 28%, but
exemption phaseout creates phantom
rates of 32.5% and 35%
• Not indexed for inflation
www.taxpolicycenter.org
AMT Preference Items
Tax Policy
Center
Urban Institute
And
Brookings Institution
•
State and local tax deductions (51% of total)
•
Personal Exemptions (22%)
•
Miscellaneous deductions above the 2% floor (20%)
•
Net Operating Losses (12%)
•
Incentive Stock Options (2%)
•
Passive Activity Loss (2%)
•
Post-1986 Depreciation (1%)
•
Standard Deduction (1%)
•
Private Activity Bonds Interest (1%)
•
Medical Deductions (1%)
Note: Sum adds to more than 100 percent because some adjustments not shown, such
as state tax refunds, are negative.
Source: Burman and Weiner, “Suppose they Took the AM out of the AMT.”
www.taxpolicycenter.org
Causes of AMT Growth
Tax Policy
Center
40
Number of AMT
Taxpayers (Millions)
Urban Institute
And
Brookings Institution
45
Current Law
(extended)
35
30
Effect of income tax cuts
without permanent AMT fix
25
20
Pre-2001 Law
15
10
Effect of failure to
index for inflation
Pre-2001 Law,
with indexing
5
0
2006
2007
2008
2009
2010
2011
2012
Year
Urban-Brookings Tax Policy Center Microsimulation Model, 2005
www.taxpolicycenter.org
2013
2014
2015
AMT Projections
Tax Policy
Center
Urban Institute
And
Brookings Institution
• Baseline AMT revenue = $1.2
trillion from 2005-15
– $670 billion if the tax cuts are
not extended in 2010
• About 4% of taxpayers on
AMT in 2005
– 20% in ’06 and 30% in ’10
www.taxpolicycenter.org
AMT Demographics (2010)
Tax Policy
Center
Urban Institute
And
Brookings Institution
• AMT inflicts large marriage/child
penalties
– 48% of married couples vs. 3% of
singles on AMT
– 94% of marrieds with 2+ kids and
AGI between $75&100K
• Residents of high-tax states are 5
percentage points more likely to
be on AMT than those in low-tax
states
www.taxpolicycenter.org
Drifting Off Target
Tax Policy
Center
Urban Institute
And
Brookings Institution
• Though intended to make highincome people pay tax, AMT will
increasingly hit middle class
– Over 80% of AMT taxpayers will have
income < $200K in 2010
• More than 1/3 have income < $100K
– Families earning $75-100K 18% more
likely to be on AMT than those
earning over $1 million
• Those earning $100-200K more than twice
as likely as millionaires
www.taxpolicycenter.org
Problems with the AMT
Tax Policy
Center
Urban Institute
And
Brookings Institution
• Good Tax Policy is…
– Simple
– Efficient
– Fair
• The AMT violates all of these principles.
www.taxpolicycenter.org
Pointless Complexity
Tax Policy
Center
Urban Institute
And
Brookings Institution
• Many middle class taxpayers must file
AMT Form 6251, but owe no AMT
• AMT rules regarding credits, capital
gains, dividends, deferral preferences
very complex
• Most deferral preferences don’t even
generate much revenue, just change the
timing of tax payments
• Vastly complicates tax planning
www.taxpolicycenter.org
Efficiency
Tax Policy
Center
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And
Brookings Institution
• The AMT raises marginal tax rates for most
– 71% of AMT taxpayers face higher marginal tax rates
under AMT in 2005
– 92% will be in that situation in 2010
– People creep into higher brackets over time because,
unlike the regular income tax, AMT is not indexed
• Might enhance efficiency to extent that it
deterred tax shelters, but 90% of AMT
preferences have nothing to do with shelters
www.taxpolicycenter.org
Equity
Tax Policy
Center
Urban Institute
And
Brookings Institution
• Nasty marriage/child penalties
• Some legitimate adjustments to ability to pay
are disallowed under AMT (e.g., contingent
legal fees)
• AMT makes the tax system more progressive,
but less so over time
• Relatively little tax collected from very rich
www.taxpolicycenter.org
Conclusions
Tax Policy
Center
Urban Institute
And
Brookings Institution
• Pointless complexity and
bizarre pattern of taxes
• Increasingly a tax on the
upper middle class
• Better to build anti-tax shelter
provisions into regular tax and
adjust rates to hit revenue
target
www.taxpolicycenter.org
Appendix
Tax Policy
Center
Urban Institute
And
Brookings Institution
• Supplemental tables and
charts
• Further reading
www.taxpolicycenter.org
AMT Exemptions and Schedule
Tax Policy
Center
Urban Institute
And
Brookings Institution
Exemption
Married
Couples, joint
Singles
20032005
Beyond
2005
Threshold for
Phase-Out
$58,000
$40,250
$45,000
$33,750
$150,000
$112,500
Schedule
Married
couples and
singles
www.taxpolicycenter.org
$0 - $175,000
Above $175,000
26%
28%
Rate Schedule for Couples,
AMT vs. Regular Tax: 2004
Tax Policy
Center
40%
Urban Institute
And
Brookings Institution
35%
30%
Rate
25%
20%
15%
10%
AMT
5%
Regular Income Tax
0%
0
50
100
150
200
250
300
350
400
450
Income (in thousands of dollars)
Note: Figure assumes married couple filing jointly with 2 children claiming standard deduction against
regular income tax and no other deductions or credits. All income is from wages. Figure does not show
the effect of the personal exemption and itemized deduction phaseouts under the regular tax.
www.taxpolicycenter.org
500
Total AMT Revenue, 2005-15
Tax Policy
Center
200
175
Urban Institute
And
Brookings Institution
Current Law (extended)
Billions of Dollars
150
125
100
75
Pre-EGTRRA Law
50
25
0
2005
2006
2007
2008
2009
2010
2011
2012
Year
Urban-Brookings Tax Policy Center Microsimulation Model, 2005
www.taxpolicycenter.org
2013
2014
2015
By 2008, it will cost more to repeal the AMT
than the regular income tax.
Urban Institute
And
Brookings Institution
200
Revenue Cost in $Billions
Tax Policy
Center
160
Cost of repealing the regular tax
120
80
40
Cost of repealing the AMT
0
2005
2006
2007
2008
2009
2010
Year
Urban-Brookings Tax Policy Center Microsimulation Model, 2005
www.taxpolicycenter.org
AMT Projections by
Individual Characteristics
Tax Policy
Center
Percent on AMT
Urban Institute
And
Brookings Institution
Characteristic
2005
Current Law
2006
2010
Percent of Taxpayers
3.8
20.4
30.4
Percent of Tax Filers
2.7
14.6
22.6
0.8
5.2
0.8
5.9
1.6
30.7
4.2
29.0
2.9
47.9
7.9
45.9
by Filing Status
Single
Married Filing Joint
Head of Household
Married Filing Separate
Addendum: AMT Revenue in $billions, 2005-2015
670.3
Current Law
1,201.2
Current Law Extended
Urban-Brookings Tax Policy Center Microsimulation Model, 2005
www.taxpolicycenter.org
AMT Projections by
Individual Characteristics
Tax Policy
Center
Urban Institute
And
Brookings Institution
AMT Participation Rate (percent)
Current Law
Characteristic
2005
Filers By State Tax Level*
Low
Middle
High
0.8
1.3
2.7
10.5
13.9
15.8
18.3
22.6
23.8
Filers by Number of Children
0
1
2
3 or more
1.8
2.5
5.0
8.4
8.3
17.6
31.4
37.0
15.6
27.9
40.6
47.7
1.6
77.2
94.4
Married Couple, 2+ kids,
75k<AGI<100k
2006
*Excludes effect of sales tax deduction, in effect for 2005.
Urban-Brookings Tax Policy Center Microsimulation Model, 2005
www.taxpolicycenter.org
2010
AMT Projections by Income
Tax Policy
Center
Urban Institute
And
Brookings Institution
AMT Participation Rate (percent)
Cash Income
(thousands of 2003$)
Less than 30
30-50
50-75
75-100
100-200
200-500
500-1,000
1,000 and more
Current Law
2005
2006
2010
0.0
0.1
0.5
0.8
6.8
53.4
39.3
26.7
0.0
1.1
6.0
31.8
63.0
87.0
51.8
33.4
0.0
2.9
16.9
53.4
81.0
93.9
62.6
35.3
Urban-Brookings Tax Policy Center Microsimulation Model, 2005
www.taxpolicycenter.org
Percent of AMT Taxpayers who Face
Higher Marginal Tax Rates Under the AMT
Tax Policy
Center
Urban Institute
And
Brookings Institution
Cash Income
(Thousands of $2003)
2005
2010
All Taxpayers
71.6
92.3
Less than 30
30-50
50-75
75-100
100-200
200-500
500-1,000
More than 1,000
99.5
92.3
99.2
89.5
89.0
67.2
29.5
29.5
93.4
97.5
98.6
97.0
94.9
80.0
25.2
30.2
Source: Urban-Brookings Tax Policy Center Microsimulation Model, 2005
www.taxpolicycenter.org
Distribution of AMT versus
Regular Tax Liability: 2005 & 2010
Tax Policy
Center
59
60
2005 AMT
2005 Regular
50
Percent
Urban Institute
And
Brookings Institution
70
40
30
30 30
26
21
21
20
10
10
0
3
1
0
< 50
50 - 100
100 - 200
200 - 500
500 +
Income Group
38
40
34
35
Percent
30
2010 AMT
30
27
2010 Regular
25
22
19
20
15
16
11
10
5
0
3
0
< 50
50 - 100
100 - 200
Income Group
www.taxpolicycenter.org
200 - 500
500 +
Further Reading
Tax Policy
Center
Urban Institute
And
Brookings Institution
Burman, Leonard E. and David Weiner. 2004. “Suppose They Took the AM out of the AMT?” available at
www.taxpolicycenter.org. (examines issues raised if the AMT were a standalone income tax)
Burman, Leonard E., William G. Gale, Jeffrey Rohaly, Matthew Hall, and Mohammed Adeel Saleem. 2004.
“AMT: A Data Update” available at www.taxpolicycenter.org. (includes estimates of some reform
options)
Burman, Leonard E., William G. Gale and Jeffrey Rohaly. 2003. “Policy Watch: The Expanding Reach of the
Individual Alternative Minimum Tax,” with Journal of Economic Perspectives 17(2): 173-186.
Burman, Leonard E., William G. Gale, Jeffrey Rohaly, and Benjamin H. Harris. 2002. “The Individual AMT:
Problems and Potential Solutions,” National Tax Journal 55(3): 555-596.
Feenberg, Daniel R., and James M. Poterba. 2004. “The Alternative Minimum Tax and Effective Marginal
Tax Rates,” National Tax Journal 57(2): 407-427.
General Accounting Office. 2000. “Alternative Minimum Tax: An Overview of its Rationale and Impact on
Individual Taxpayers.” Report to the Chairman, Committee on Finance, U.S. Senate (GAO/GGD-00180). August.
Harvey, Robert P. and Jerry Tempalski. 1997. “The Individual AMT: Why it Matters.” National Tax Journal
50(3): 453-473.
Rebelein, Robert and Jerry Tempalski. 2000. “Who Pays the Individual AMT?” U.S. Department of the
Treasury, OTA Paper 87.
www.taxpolicycenter.org