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 pending expiration of the 2001 and 2003 regular income tax cuts, have increased congressional concern about the alternative minimum tax.
The 2001 and 2003 tax cuts (P.L. 107-16 and P.L. 108-27) 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. The Working Families Tax Relief Act of 2004 (P.L. 108- 311) extended those increases in the AMT exemption through 2005. Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) patched the AMT for 2006 and allowed nonrefundable personal tax credits to offset AMT liability in full. The Tax Increase Prevention Act of 2007 (P.L. 110-166), enacted on December 26, 2007, increased the exemption and allowed all personal and business credits against the AMT. The Tax Extenders and Alternative Minimum Tax Relief Act, which was included in the Emergency Economic Stabilization Act of 2008 (P.L. 110-343) and enacted on October 3, 2008, extended the AMT patch for the 2008 tax year.
The American Recovery and Reinvestment Act of 2009 (P.L. 111-5), included a one-year patch for the 2009 tax year. On December 17, 2010, the AMT was patched for the 2010 and 2011 tax years by P.L. 111-312. The cost of the two-year patch was estimated to cost $136.7 billion over the 2011 to 2020 budget window. The AMT is not patched for the 2012 tax year. This means that, when coupled with the extension of the 2001 and 2003 tax cuts, roughly 34 million taxpayers will be affected by the AMT in 2012. Indexing the AMT for inflation permanently, as proposed in the President’s FY2013 budget, would cost an estimated $1.9 trillion over the 2013 to 2022 budget window, as measured against current law. In the Senate, S. 3521 would patch the AMT for the 2012 and 2013 tax years for an estimated revenue loss of $132.2 billion.
Date of Report: September 20, 2012
Number of Pages: 12
Order Number: RL30149
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