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Monday, February 4, 2013

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 AMT has often been the subject of congressional debate. In 2012, the combined effects of inflation and the anticipated expiration of the 2001 and 2003 regular income tax cuts increased congressional concern about the alternative minimum tax. Many policymakers endorsed plans to either permanently patch the AMT as an adjustment for inflation or to repeal the tax outright. In early 2013, however, the American Taxpayer Relief Act of 2012 (ATRA, P.L. 112-240) indexed the parameters of the AMT for inflation beginning retroactively with the 2012 tax year. The so-called permanent patch of the AMT is estimated to reduce federal revenue by $1.816 trillion over the 2013 to 2022 budget window.

Date of Report: January 17, 2013
Number of Pages: 12
Order Number: RL30149
Price: $29.95

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