January 15, 2010
The number of people who will be subject to the alternative minimum tax (AMT) will increase dramatically in 2010 under current law. About 4.5 million taxpayers were affected by the AMT in 2009. That number has been kept relatively small by annual modifications to the AMT rules, but the most recent modifications expired at the end of calendar year 2009. Consequently, about 27 million taxpayers (see figure below)—one out of every six taxpayers—will be affected by the AMT in 2010, paying on average an additional $3,900 in tax. Nearly every married taxpayer with income between $100,000 and $500,000 will owe some alternative tax.
Tax Returns Affected by the Alternative Minimum Tax (Millions)
For the past four decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax, which was originally intended to impose taxes on high-income individuals who use tax preferences to greatly reduce or eliminate their liability under the regular income tax. The current version of the AMT requires people to recalculate their taxes under rules that include in their taxable income certain types of income that are exempt from the regular income tax and that do not allow certain exemptions, deductions, and other preferences. That second set of rules increases the amount of taxes paid by some taxpayers; modifies or limits various credits, deductions, and exclusions that apply to regular income taxes; and adds to the complexity of the tax system.
For most of its existence, the AMT has played a minor role in the tax system, accounting for less than 2 percent of individual income tax revenues (or 1 percent of total revenues) and affecting less than 1 percent of taxpayers in any year before 2000. Since then, the tax would have reached more and more taxpayers (because, unlike the parameters of the regular income tax, those of the AMT are not indexed for inflation), but lawmakers have intervened each year to slow that expansion. In addition, a series of reductions in the regular income tax enacted starting in 2001 would have caused even more returns to be subject to the AMT were it not for the series of temporary adjustments that lawmakers made to the alternative tax.
As an increasing number of taxpayers incur liabilities under the AMT, pressures to permanently reduce, eliminate, or otherwise modify the tax are likely to grow. A brief released by CBO today describes the expanding scope of the AMT and the changes in the types of taxpayers affected by the tax, if current law remains unchanged. The brief also discusses three options that illustrate the range of choices policymakers face: indexing the AMT’s parameters for inflation; allowing additional exemptions and deductions under the AMT; and eliminating the AMT. Each of those options would involve revenue losses of several hundred billion dollars over the next 10 years relative to receipts projected under current law.
This brief was prepared by Joshua Shakin of CBO’s Tax Analysis Division.