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Friday, April 2, 2010

The Alternative Minimum Tax for Individuals

Steven Maguire
Specialist in Public Finance

Over time, the individual income tax has been used as a vehicle to promote various social and economic goals. This has been accomplished by according preferential tax treatment to certain items of income and expense. The net result, however, has been that by taking advantage of the preferences and incentives in the tax code, some individuals can substantially reduce their income taxes. 

Congress, in 1969, enacted the predecessor to the current individual alternative minimum tax (AMT) to make sure that everyone paid at least a minimum of taxes and still preserve the economic and social incentives in the tax code. The AMT is calculated in the following manner. First, an individual adds back various tax preference items to his taxable income under his regular income tax. This amount then becomes the AMT tax base. Next, the basic exemption is calculated and subtracted from the AMT tax base. A two-tiered tax rate structure of 26% and 28% is then assessed against the remaining AMT tax base to determine liability. The taxpayer then pays whichever is greater, the regular income tax or the AMT. Finally, the AMT tax credit is calculated as an item to be carried forward to offset regular income tax liabilities in future years. 

Since its inception, the value and effectiveness of the minimum tax has often been the subject of congressional debate. Recently, the combined effects of inflation and the legislative reductions in the regular income tax, enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27), and the Working Families Tax Relief Act of 2004 (WFTRA, P.L. 108- 311), have increased congressional concern about the expanding impact of the alternative minimum tax. 

Both EGTRRA and JGTRRA provided for temporary increases in the basic exemption for the AMT as a means of mitigating the interaction between the reductions in the regular income tax and the AMT. WFTRA extended those increases in the AMT exemption through 2005. The Tax Increase Prevention Act of 2007 (TIPA, P.L. 110-166), enacted on December 26, 2007, increased the exemption for joint filers to $66,250 and to $44,350 for unmarried filers and allowed all personal and business credits against the AMT. The Tax Extenders and Alternative Minimum Tax Relief Act, which was included with the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) and enacted on October 3, 2008, extended what is known as the AMT patch for the 2008 tax year by raising the exemption to $69,950 for joint filers and $46,200 for unmarried filers. 

In the 111th Congress, P.L. 111-5, The American Recovery and Reinvestment Act of 2009, included a one-year patch for the 2009 tax year and increased the exemption amounts to $46,700 for individuals and $70,950 for joint filers. As with recent AMT patch legislation, personal credits are allowed against the AMT. 

Indexing the AMT for inflation from the 2009 levels through 2020, as proposed in the President's 2011 budget, would cost an estimated $658.8 billion. The FY2010 budget resolution conference report (S.Con.Res. 13) provided for three years of relief from the AMT, through 2012, without the need for any revenue offset.

Date of Report: March 24, 2010
Number of Pages: 12
Order Number: RL30149
Price: $29.95

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