November 2007

The Alternative Minimum Tax: A Growing Burden on Middle Class Americans

by Amy K. Frantz

The Alternative Minimum Tax (AMT) is, according to the Internal Revenue Service (IRS) “a separately figured tax that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less tax.”[1]  The AMT was created to tax the wealthiest of Americans, but has instead become a burden on the American middle class.

The AMT was enacted in 1969 because it was discovered that 155 wealthy taxpayers were able to use the exemptions and deduction in the tax code to completely eliminate their tax liability.[2]  The AMT has more limited deductions than the regular income tax – taxpayers paying the AMT are not able to deduct state and local taxes, for example.  Taxpayers with a certain level of income must calculate their tax liability using the IRS 1040 form and calculate again using the AMT, then pay the higher of the two tax calculations.

The income exemptions for the AMT were not indexed for inflation, thus the only way the exemptions can be increased is for Congress to act. In 2001 and 2005 Congress approved temporary increases in the exemption levels, but the most recent “patch” expired after the 2006 tax year.  If no action is taken, the exemption levels will fall back to the 2000 levels of $33,750 for single filers and $45,000 for joint filers.

How many taxpayers are impacted by the AMT? “In 2006, 4.2 million taxpayers paid about $25 billion in AMT.  But if Congress does not extend relief provisions that had been in place in prior years, 23 million taxpayers will have to pay about $73 billion in AMT” for the 2007 tax year.[3]  Many more “taxpayers must decipher a separate instruction booklet and then fill out a 55-line form, only to discover they don’t owe the AMT.  This exercise is a major detour in tax preparation.”[4]

This growing pool of taxpayers subject to the AMT will only grow larger if nothing is done. “By 2010, over 30 million taxpayers will have to compute and pay the AMT.”[5]  According to the nonpartisan Congressional Budget Office, “long-term budget forecasts show that if Congress does nothing, 65% of American households will pay the AMT by 2050.  Roughly 15% of individual income tax liability would be generated by the AMT, compared with about 2% today.”[6]

Will Congress take action to protect the millions more taxpayers that will be subject to the AMT for the 2007 tax year? Treasury Secretary Henry Paulson is urging Congress to approve a temporary fix for the AMT by early November, when the IRS must begin printing the 2007 tax return forms.[7]

One roadblock for a temporary or permanent fix to the AMT is the Democrat-controlled Congress’ insistence on Pay-As-You-Go (PAYGO) budgeting, requiring any tax cuts to be offset with spending cuts (dream on!) or tax increases.[8]  With Congress addicted to spending, it is unlikely that spending cuts will even be considered.  Instead, under PAYGO rules, Congress must raise nearly $50 billion in other new or increased taxes in one year to offset the cost of a one-year fix to the AMT.  Representative Charlie Rangel (D-NY), the Chairman of the House Ways and Means Committee, has proposed legislation to permanently repeal the AMT, but would replace it with “a 4% income tax surcharge on anyone who makes more than $200,000 a year, or 4.6% if you make $500,000 ($250,000 for singles).  Mr. Rangel also wants to raise the capital gains tax rate to 19.6% from 15% today, and raise taxes on dividends, business partnerships, and companies with foreign subsidiaries.  Add it all up and you get new taxes of $1 trillion or more.”[9]  Yes, Trillion!  “Tax Foundation data show that three of four taxpayers in the highest income tax bracket are small business owners or farmers.”[10]  Chairman Rangel and his fellow Democrats seem to want to punish those taxpayers who are creating jobs and economic output in the name of tax “fairness.”

The tax that was created to ensure the wealthiest of Americans were paying income taxes has not fulfilled its original intent. “Even with the AMT, 5,650 tax filers with incomes of over $200,000 owed no income taxes in 2002.”[11]  Instead the AMT is becoming a burden to more and more middle-income taxpayers.

Amy K. Frantz is Senior Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] “Topic 556 – Alternative Minimum Tax,” Internal Revenue Service, www.irs.gov/taxtopics/tc556.html (October 29, 2007).

[2] Senator Chuck Grassley, “How to Fix the AMT,” The Wall Street Journal, October 11, 2007, p. A21.

[3] Chris Edwards, “The Alternative Minimum Tax:  Repeal Not Reform,” Tax & Budget Bulletin, Cato Institute, May 2007.

[4] David Keating, “A Taxing Trend: The Rise in Tax Complexity, Forms, and Paperwork Burdens,” NTU Policy Paper 124, National Taxpayers Union, April 16, 2007.

[5] Ibid.

[6] Grassley.

[7] Brian Blackstone, “Paulson Pushes for AMT Action,” The Wall Street Journal Online, Washington Wire Blog, October 23, 2007, http://blogs.wsj.com/washwire/2007/10/23/paulson-pushes-for-amt-action/trackback/ (October 24, 2007).

[8] For more on the PAYGO issue, read “Pay As You Go Budgeting: False Assurance of Fiscal Responsibility,” a Public Interest Institute BRIEF by John R. Hendrickson.

[9] “Trillion-Dollar Baby,” The Wall Street Journal, October 26, 2007, p. A16.

[10] Ibid.

[11] Paul Dorasil, “The Alternative Minimum Tax Threatens Middle-Income Families,” National Center for Policy Analysis BRIEF ANALYSIS No. 521, September 11, 2006.