A Primer on the AMT

April 14, 2006

As the tax deadline approaches next Monday for most Americans, much of the attention on tax policy recently has focused on the issue of the Alternative Minimum Tax, or AMT. Tax year 2005 for which taxpayers are filing right now will mark an estimated 16 percent increase in the number of filers that will be subject to AMT compared to last year (TY 2004). Overall, since President Bush took office and immediately began cutting rates on regular income taxes, the number of taxpayers that are hit with AMT has nearly tripled, going from 1.3 million in 2000 to an estimated 3.6 million in 2005.

For tax year 2006 (which you will file next spring) that number will see its biggest up tick ever because the exemption threshold is set to fall (under current law). As the table below shows, projections from the Joint Committee on Taxation have approximately 19 million tax returns being subject to AMT, compared to its estimate that only 3.6 million were hit for tax year 2005, a near six-fold increase.

Numbers on AMT

Year

# of AMT Returns
(in millions)

Amount of AMT minus Regular Tax
($ billions)
1995 0.4 2.3
1996 0.5 2.8
1997 0.6 4
1998 0.9 5
1999 1 6.5
2000 1.3 9.6
2001 1.1 6.8
2002 1.9 6.9
2003 2.4 8.7
2004^ 3.1 12.1
2005* 3.6 20.7
2006* 19 57
2007* 21.5 66
2008* 24.1 81.4
2009* 26.5 91.8
2010* 29 109.6
2011* 14.8 41.5
2012* 16.8 47.1
2013* 19 54.2
2014* 21.7 62.4
2015* 24.4

70.4

Note: ^ Preliminary 2004 IRS Statistics.
* Projections from Joint Committee on Taxation

Currently, the exemption amount for married couples filing jointly is $58,000 and $40,250 for unmarried filers. Next year, those numbers revert back to their pre-2001 schedules of $45,000 for married couples filing jointly and $33,750 for unmarried filers. Unlike elsewhere in the tax code, these numbers are not adjusted annually for inflation (based upon the CPI-U inflation measure).

Those numbers do not mean that everyone whose adjusted gross income (AGI) exceeds that mark will be subject to AMT, however. Tax returns are subject to AMT only if the alternative minimum tax exceeds the regular tax. AMT uses a broader definition of income than the regular tax and limits the use of certain deductions – specifically the deduction for state/local taxes, the medical and dental expenses deduction, and other miscellaneous deductions.

Because AMT will only apply if one’s alternative minimum tax exceeds the regular tax, then any policy that significantly lowers regular tax liabilities while mostly leaving AMT alone is going to obviously cause more tax returns to have the AMT exceed the regular tax. This impact is evident by the sharp decline projected for the number of AMT filers in 2011. In 2011, when all of the Bush tax cuts are expected to expire, the number of AMT filers is projected to be cut nearly in half (from 29 million in 2010 to 14.8 million in 2011). Therefore, despite its drawbacks, one could look at AMT as mitigating for many the tax hike that would come in 2011 for millions of Americans if the “Bush” tax cuts were not made permanent, as they would already be paying AMT — a tax higher than their currently reduced regular tax.

In summary, five factors have caused and are continuing to cause the number of AMT filers to grow:

(1) In 2006, the statutory threshold exemption is set to fall.

(2) Nominal incomes are growing, while AMT thresholds are not adjusted for inflation.

(3) Higher local taxes on income and property (partially the result of higher property values caused by the housing boom), meaning the deduction for state/local taxes (which is not allowed on AMT) will grow, thereby increasing the likelihood that one’s alternative minimum tax will be greater than one’s regular tax.

(4) PEP/Pease elimination, which too will expand the value in the regular tax of those currently AMT-restricted deductions, thereby increasing the likelihood that one’s alternative minimum tax will be greater than one’s regular tax.

(5) Lower taxes on regular income (i.e. the “Bush” tax cuts).

For more on the Alternative Minimum Tax, check out this Tax Foundation backgrounder piece on the topic by economists Patrick Fleenor and Andrew Chamberlain.


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