A Primer on the Alternative Minimum Tax (AMT)
by Guest Blogger, 2/15/2002
What is the Alternative Minimum Tax (AMT)?
Will the AMT Get You?
One of the many criticisms of the "Economic Growth and Tax Relief Reconciliation Act of 2001" is that it will increase the number of taxpayers who are liable for the Alternative Minimum Tax (AMT), thus erasing any benefits of the tax cut for those taxpayers.
Unless you have been faced with the AMT, you probably don't know what it is. Here are some facts about the AMT, since paradoxically, because of the "benefits" of the Bush tax cut, you now may be liable for a higher tax rate under the AMT.
Why is there an AMT?
The Alternative Minimum Tax was designed to make sure that wealthier Americans could not get out of paying income taxes through the many special tax breaks (i.e., the "loopholes" of special deductions, special credits for expenses, and preferential treatment of some income) that wealthier taxpayers can often enjoy, unlike those of us who file by phone or complete the EZ form. In other words, the AMT was specifically enacted to correct some of the excessive preferences that the wealthy enjoy in terms of income tax -- not to penalize middle-income Americans.
What is the AMT?
The AMT is a separate "alternative" tax rate, setting the amount of taxes that a person with a certain income should be required to pay. Taxpayers with higher incomes or big deductions are required by the AMT law to calculate their taxes twice -- once using regular income tax provisions and once using the AMT. They then pay whichever is higher. The AMT:
- Reduces or eliminates some special tax benefits found under regular income tax.
- Uses a special exemption rate that is supposed to be high enough to protect regular taxpayers from being liable.
- Has its own set of marginal rates starting at 26% and moving to 28%.
Who Pays the AMT?
An early attempt at an Alternative Minimum Tax was enacted in 1969. In 1970, only 19,000 taxpayers owed an AMT. The current AMT was legislated in 1989, with some modifications since. About 600,000 taxpayers were liable for the AMT in 1996. This year, about 2 million taxpayers will be affected. Without the Bush tax cut, it was estimated that by 2011 almost 21 million taxpayers would be affected by the AMT. With the tax cut, according to the Joint Committee on Taxation (JCT), that estimate rises to 35 million, or almost one-fourth of all taxpayers, who will have to pay increased taxes under the AMT in 2011. The tax cut will cause even more middle-income taxpayers to be required to pay more taxes under the AMT.
Why Will the AMT Affect More People?
Regular income tax rates -- the personal exemption, the standard deduction, and tax brackets -- are indexed for inflation. So, if your income keeps pace with inflation, the percent of your income you owe in taxes will remain about the same. The AMT brackets and exemptions are not adjusted for inflation. If the AMT remains as it is, without adjusting for inflation, more and more Americans will become liable. Remember, the AMT has its own exemption rate, which has essentially stayed the same since 1989. The Bush tax cut worsens this situation, since it lowers the regular tax bracket without raising the AMT liability, causing many more taxpayers to find themselves liable for AMT payments.
Why Not Just Fix It?
Simply adjusting the AMT for inflation would keep the AMT relatively constant, but, according to the Joint Committee on Taxation, it would cost more than $100 billion over the next decade. To insure that taxpayers get the full benefits of the Bush tax cut, the JCT estimates that it would cost almost three times that much, or $292 billion over 10 years. With the provisions of the Bush tax cut shrinking federal revenue, it will be difficult -- or impossible -- to find an extra $292 billion to fix the problem.