Does Your State Have an Individual Alternative Minimum Tax?

September 25, 2019

This week’s map shows the five states that have an Alternative Minimum Tax (AMT) in their individual income tax codes: California, Colorado, Connecticut, Iowa, and Minnesota. Under an individual AMT, many taxpayers are required to calculate their income tax liability under two different systems and pay the higher amount.

The federal AMT was created in 1963, after Congress discovered that 155 high-income taxpayers were eligible to claim so many deductions that they ended up with no federal income tax liability at all. The federal AMT disallows the standard deduction and adds back certain itemized deductions—including the state and local tax (SALT) deduction—thus recapturing income from taxpayers who would otherwise be eligible to claim those expenditures.

While the federal AMT was originally intended to be a narrow fix to a narrow problem, it was not indexed for inflation. As a result, it wasn’t long before many middle-income taxpayers found themselves having to calculate and pay an AMT. Several states followed suit by implementing their own AMTs. This meant some taxpayers had to calculate their tax liability four times: twice under the federal code and twice under their state’s code.

The Tax Cuts and Jobs Act increased the federal AMT’s exemption amounts and phaseout thresholds through 2025, meaning fewer taxpayers will be required to calculate and pay the federal AMT in forthcoming years. In states that conform to the federal provision or use it as the basis for their own calculation, fewer filers will be subject to the AMT—for now. (To the extent that states use old thresholds, filers will have to go through the process of calculating a state AMT even if no longer subject to a federal AMT.) Unless Congress chooses to extend it, the higher exemption amounts will sunset after 2025, a change that will also impact state tax codes.

The original goal of AMTs—to prevent deductions from eliminating income tax liability altogether—can be accomplished best by simplifying the existing tax structure, not by instating an alternative tax which adds complexity and lacks transparency and neutrality.

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The state and local tax (SALT) deduction permits taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments. The Tax Cuts and Jobs Act capped it at $10,000 per year, consisting of property taxes plus state income or sales taxes, but not both.

The standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.

An itemized deduction allows individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most high-income taxpayers. 

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. Individual income taxes are the largest source of tax revenue in the U.S.

The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT—and pay whichever amount is highest. The AMT has fewer preferences and different exemptions and rates than the ordinary system.