Alternative Minimum Tax: Overview of Its Rationale and Impact on
Individual Taxpayers (Testimony, 03/08/2001, GAO/GAO-01-500T).
This testimony focuses on the Alternative Minimum Tax (AMT), its
interaction with the regular tax system, and its projected growth in
coverage. GAO found that (1) AMT was designed to ensure that high-income
individuals do not avoid significant income tax liabilities--for tax
year 1997, about 14,000 taxpayers would not have paid any income taxes
absent AMT, (2) AMT operates as a separate tax system that parallels the
regular individual income tax system but with different rules for
determining taxable income, different tax rates for computing tax
liability, and different rules for allowing the use of tax credits, (3)
AMT affected about one percent of taxpayers in 2000 and accounted for
about $5.8 billion in additional tax revenue; by 2010, it is expected to
increase the tax liabilities of about one out of six taxpayers and
account for about $189 billion in tax revenues over the period, (4) the
projected increase in AMT coverage is, for the most part, attributable
to inflation and to the scheduled expiration of legislation temporarily
excluding some tax credits from AMT rules, and (5) AMT's impacts include
increased taxpayer compliance burden; increased Internal Revenue Service
administrative cost; redistribution of the tax burden among taxpayers;
changed economic incentives; and the potential to neutralize, for some
taxpayers, changes to the tax system. This testimony summarized the
August report, GGD-00-180.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GAO-01-500T
TITLE: Alternative Minimum Tax: Overview of Its Rationale and
Impact on Individual Taxpayers
DATE: 03/08/2001
SUBJECT: Taxpayers
Tax administration
Federal taxes
Income taxes
Tax credit
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GAO-01-500T
ALTERNATIVE MINIMUM TAX
Overview of Its Rationale and Impact on Individual Taxpayers Statement of
James R. White Director, Tax Issues
United States General Accounting Office
GAO Testimony Before the Committee on Finance,
United States Senate
For Release on Delivery Expected at 10: 00 a. m. EST on Thursday March 8,
2001
GAO- 01- 500T
1 Chairman Grassley, Ranking Member Baucus and Members of the Committee
I am pleased to participate in the Committee's hearing on family tax relief.
My statement focuses on the Alternative Minimum Tax (AMT), its interaction
with the regular tax system, and its projected growth in coverage. In
summary, my statement makes the following points:
AMT was designed to ensure that high- income individuals do not avoid
significant income tax liabilities-- for tax year 1997, about 14,000
taxpayers would not have paid any income taxes absent AMT.
AMT operates as a separate tax system that parallels the regular individual
income tax system but with different rules for determining taxable income,
different tax rates for computing tax liability, and different rules for
allowing the use of tax credits.
AMT affected about 1 percent of taxpayers in 2000 and accounted for about
$5.8 billion in additional tax revenue; by 2010, it is expected to increase
the tax liabilities of about one out of six taxpayers and account for about
$189 billion in tax revenues over the period.
The projected increase in AMT coverage is, for the most part, attributable
to inflation (the regular tax system is indexed for inflation, but the AMT
is not) and to the scheduled expiration of legislation temporarily excluding
some tax credits (such as child tax credits) from AMT rules.
AMT's impacts include increased taxpayer compliance burden; increased IRS
administrative cost; redistribution of the tax burden among taxpayers;
changed economic incentives; and the potential to neutralize, for some
taxpayers, changes to the tax system.
My testimony today is based on our August 2000 report to the Committee. 1
RATIONALE FOR ESTABLISHING AMT AMT was created to reduce the ability of
high- income individuals to escape payment of tax on income by using tax
preferences available under the regular tax system. A type of minimum tax
was first enacted in 1969, following congressional testimony by the
Secretary of the Treasury reporting that 155 individuals, each with adjusted
gross income above $200,000 (about $1.1 million in fiscal year 2000
dollars), paid no federal income tax in 1966.
Over the intervening years, the minimum tax has been amended a number of
times, producing today's AMT. Although the mechanics of AMT were
periodically modified, the objective of limiting high- income taxpayers'
ability to avoid significant tax liability by using tax preferences was
retained. 2 According to recent IRS calculations, about 14,000 taxpayers
would not have had any individual income tax liability absent AMT in tax
year 1997.
1 See Alternative Minimum Tax: An Overview of Its Rationale and Impact on
Individual Taxpayers (GAO/ GGD- 00- 180, Aug. 15, 2000). 2 See S. Rept. No.
313, 99 th Cong., 2d sess., p. 520.
2 HOW AMT WORKS
In general, AMT is a separate tax system that parallels the regular
individual income tax system. It generates an alternative tax liability by
applying different tax rates to a broader base of income than the regular
individual income tax system does and
limiting the use of certain tax credits available under the regular income
tax. As illustrated in figure 1, taxpayers complete a series of steps to
determine if they are affected by AMT. 3
First, Taxpayers Calculate Their Regular Tax Liability.
As the first step in the process, taxpayers calculate their tax liability
based on their taxable income under the regular income tax. To determine
taxable income, 4 taxpayers add up their various items of income, such as
salaries, interest, and dividends, and then
subtract certain allowable items, such as moving expenses and alimony, to
compute Adjusted Gross Income (AGI); 5
subtract the standard or itemized deductions, such as home mortgage
interest, 6 and
subtract personal exemptions. 7 Next, taxpayers determine their regular tax
liability by applying the appropriate tax rates to this taxable income
amount. The regular individual income tax has five marginal tax rates: 15
percent, 28 percent, 31 percent, 36 percent, and 39.6 percent for tax year
2000. 8 The regular income tax also provides special tax rates for long-
term capital gains.
3 This illustration generally applies to individual taxpayers required to
file IRS Form 1040, U. S. Individual Income Tax Return. See appendix I for a
few illustrations on how individual taxpayers may have their taxes increased
by AMT in 2000. 4 Generally, all income is subject to tax; however, some
types of income are excluded, such as interest on tax- exempt bonds.
5 Deductions for determining AGI are certain items that are specifically
exempt or excluded from gross income by statute, such as the deduction for
IRA contributions, moving expenses, and alimony. 6 In 2000, the standard
deduction was $4, 400 for single filers; $6, 450 for heads of household; $7,
350 for married, filing jointly; $3, 675
for married, filing separately. 7 Personal exemptions are based on the
number of dependents claimed by a taxpayer. In 2000, personal exemptions
were $2, 800 for
each qualifying exemption, subject to phase- outs based on taxpayer income.
8 In computing a taxpayer's tax liability, the tax rates are applied to
varying levels of taxpayer income according to the taxpayer's
filing status. For example, the tax for married taxpayers filing jointly is
15 percent of the first $43, 850 in taxable income; $6, 577. 50 plus 28
percent of taxable income between $43,850 and$ 105, 950; $23, 965. 50 plus
31 percent of taxable income between $105, 950 and $161, 450; $41, 170. 50
plus 36 percent of taxable income between $161,450 and $288, 350; and
$86,854. 50 plus 39. 6 percent of taxable income over $288, 350.
3 Figure 1: Simplified Illustration of Regular Income Tax and AMT
Exclusions and deductions for AGI Standard or itemized deductions Personal
exemptions
Regular taxable income Regular tax rates
Regular tax liability (before credits) Tax credits
Regular tax liability
Calculate Regular Tax Liability Step 1: Income
No Yes
Does AMT apply?
Otherwise, complete preliminary AMT worksheet.
Go to Step 3. Step 2: Determine If AMT Applies
Stop and pay regular tax.
If claiming tax credits that are limited by AMT, go directly to Step 3 .
If claiming certain exclusions or deductions that require adjustments under
AMT rules go directly to Step 3.
Calculate AMT Liability
Personal exemptions Standard or AMT adjusted itemized deductions
AMT adjustments and preferences AMT exemption
AMT taxable income AMT tax rates
AMT liability
Regular taxable income Step 3:
Pay AMT amount less allowable tax credits. Pay regular tax
less allowable tax credits.
Step 4: Compare Tax Liabilities No Yes
Is AMT > regular tax, (before tax credits)?
A
Source: GAO Analysis. Last, taxpayers may reduce their regular tax liability
with certain tax credits unless limited by AMT rules. Taxpayers with credits
limited by AMT, such as the low income housing tax credit, are required to
go to step 3 in figure 1, bypassing step 2, in order to determine the extent
to which AMT limits apply. Under current law, taxpayers generally may not
use certain tax credits, most notably the general business credit, to reduce
their regular tax liability to an amount less than their AMT. For such
taxpayers, AMT serves as a floor for the regular income tax below which
allowable credits are disallowed but may
4 be carried over to another tax year. Under current law, however, personal
tax credits,
such as the child and education credits, are not limited by AMT rules
through 2001. However, beginning in 2002, taxpayer use of these credits to
reduce their tax liability would be limited by AMT.
Second, Taxpayers Determine Whether AMT Applies
As the second step, taxpayers determine whether they may be subject to AMT
as follows.
Taxpayers who claim certain AMT preference items under the regular income
tax that are considered AMT adjustments or preferences (for example,
percentage depletion or intangible drilling costs) are automatically subject
to the AMT rules and are to proceed directly to step 3- calculate AMT
liability. 9
Other taxpayers are to complete a worksheet that contains a series of income
tests designed to determine whether a taxpayer's income exceeds a
preliminary threshold according to the basic AMT rules. 10
If the worksheet shows that their income exceeds the threshold, taxpayers
must continue to step 3- calculate AMT liability. If the worksheet shows
that their income does not exceed the threshold, taxpayers pay their regular
tax liability without having to complete steps 3 and 4 in figure 1.
Third, Some Taxpayers Calculate AMT Liability
As the third step, taxpayers subject to AMT compute their AMT liability
using the AMT form, 11 which requires them to recalculate their taxable
income and tax liability using rules that differ from the regular income tax
rules. To calculate taxable income under AMT, taxpayers essentially start
with the taxable income amount reported under the regular system and then do
the following:
Add back their personal exemptions that were allowed under the regular
income tax.
Add back the standard or certain AMT- adjusted itemized deductions that were
allowed under the regular income tax. AMT requires taxpayers to adjust
certain itemized deductions taken under the regular income tax. For example,
AMT disallows the deduction for state and local taxes and allows only for
the deduction of medical expenses above 10 percent of AGI. 12 However, AMT
does not disallow or adjust all
9 See appendix I of GAO/ GGD- 00- 180, Aug. 15, 2000. The appendix
identifies the items that automatically subject taxpayers to the AMT rules
in step 2 of figure 1. 10 The worksheet is provided in the instructions to
IRS forms 1040 and 1040A.
11 The AMT form is IRS Form 6251, the Alternative Minimum Tax- Individuals.
This form, when necessary, is to be attached to IRS Form 1040, U. S.
Individual Income Tax Return. 12 Under the regular income tax, deductions
are allowed for medical expenses in excess of 7.5 percent of AGI.
5 itemized deductions. For example, AMT does not require taxpayers to add
back certain
mortgage interest or charitable contribution deductions to their taxable
income. 13
Add other, non- itemized, AMT adjustments and preference items taken under
the regular income tax. AMT disallows certain non- itemized preference items
and requires adjustments to other non- itemized deductions available under
the regular income tax, including some income excluded from the regular
income tax. Many of these items are related to timing of deductions allowed
for certain types of business investments. In effect, the elimination or
adjustment of certain preference items expands the base of taxable income
under AMT. 14
Subtract the AMT exemption amount based on filing status. The AMT exemption
amount ($ 45,000 for joint filers), is generally intended to replace the
personal exemptions and the standard deduction allowed under the regular
income tax. The AMT exemption is subject to a phase out based on taxpayer
income 15 and is not adjusted to account for family size.
Taxpayers then calculate their AMT liability by applying the AMT tax rates
to their AMT taxable income. The AMT applies a 26- percent tax rate on the
first $175,000 of AMT taxable income and 28 percent of such income in excess
of $175,000. 16
Fourth, Taxpayers Compare Tax Liabilities and Check the Use of Certain Tax
Credits
As the fourth step, taxpayers essentially compare their regular tax
liability (before credits) with their AMT liability, as shown in step 4 of
figure 1. In general, if their AMT liability is greater than their regular
tax liability (before credits), they must pay their AMT liability less any
allowable credits. If their AMT liability is less than their regular tax
liability (before credits), they pay their regular tax liability less any
allowable credits. 17
Currently, the AMT rules temporarily allow taxpayers to use personal credits
without limitation. 18 However, taxpayers generally may not use general
business credits to reduce their regular tax liability to an amount less
than their tax liability computed under the AMT rules. Also, taxpayers whose
AMT liability exceeds their regular tax liability may
13 See appendix I of GAO/ GGD- 00- 180, Aug. 15, 2000 for more details. 14
Ibid. 15 The $45, 000 exemption amount is subject to a phase- out of 25
percent of AMT taxable income in excess of $150, 000. The AMT
exemption for single and head of household filers is $33,750, subject to a
phase- out of 25 percent for taxable income in excess of $112, 500. The AMT
exemption amount for married individuals filing separately is $22, 500,
subject to a phase- out of 25 percent of taxable income in excess of $75,
000. 16 For married taxpayers filing separately, AMT applies the 26- percent
tax rate to the first $87,500 of AMT taxable income and the 28percent
rate on the excess. AMT also has special rules for taxing capital gains
income, which generally preserve the lower capital gains tax rates of the
regular tax system (e. g., 20- percent tax rate). 17 The foreign tax credit
can also be deducted from AMT., but it may not reduce AMT by more than 90
percent. Additionally, taxpayers
may be able to use part of their AMT liability, if applicable, to offset
their regular tax liability in the following year. Commonly referred to as
the “AMT credit,” this credit is subject to restrictive
conditions, and few taxpayers are eligible for it. 18 The Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1998 allowed
taxpayers to claim their personal
credits- including the child and education credits- in full against their
AMT liability for the tax year beginning after December 31, 1997. The Ticket
to Work and Work Incentives Improvement Act of 1999 extended that provision
through 2001.
6 not use certain refundable tax credits (e. g., the earned income tax
credit) to reduce their
AMT liability to an amount less than their tax liability computed under the
regular tax. PROJECTED INCREASES IN AMT COVERAGE AND TAX LIABILITY
Currently, according to recent research at Joint Committee on Taxation (JCT)
and Treasury, AMT affects relatively few taxpayers and generates a
relatively small portion of additional tax liability. 19 For 2000, Treasury
research indicates that about 1.3 million taxpayers- about 1.3 percent of
all taxable returns- would have to remit more in tax than they would
otherwise. Their additional tax liability was estimated at about $5.8
billion.
By 2010, however, AMT coverage and tax liabilities are projected to increase
dramatically. (See fig. 2 for trends.) Recent research at Treasury estimated
that:
The number of taxpayers affected by AMT under current law is projected to
expand from about 1.3 million in 2000 to about 17 million in 2010- a 31
percent average increase per year. By 2010, AMT is expected to affect 16
percent of all taxable returns filed by individuals, up from about 1.3
percent in 2000.
The corresponding additional AMT liability is projected to increase from
about $5.8 billion to about $38.2 billion from 2000 to 2010-- a 21 percent
average increase per year-- for a total increase of $189 billion over this
period.
19 For reporting purposes, we used data estimates from recent research
conducted at the Department of the Treasury's Office of Tax Analysis. See
Robert Rebelein and Jerry Tempalski, Who Pays the Individual AMT?, Office of
Tax Analysis Working Paper 87 (June 2000). All estimates in this paper were
made using the Treasury Department's Individual Tax Model in combination
with the administration's economic forecast from the FY 2001 Budget. This
working paper notes that the views expressed in the paper do not necessarily
represent official Treasury positions. Accordingly, we limited our use of
the paper to the data produced by the Treasury models and refer to the
working paper as recent research at Treasury. Also, JCT provided us with
updated tables from its report, Present Law and Background Relating to the
Marriage Tax Penalty, Education Tax Incentives, the Alternative Minimum Tax,
and Expiring Tax Provisions (JCX- 39- 99).
7 Figure 2: Actual and Projected Number of Taxpayers Affected Financially by
AMT
Source: Department of the Treasury, Office of Tax Analysis Working Paper 87
(June 2000) The additional tax liability generated by AMT has two
components.
The additional tax liability generated from individuals with direct AMT
liabilities is projected to increase from $3.4 billion in 2000 to $26.4
billion in 2010. The number of affected individuals is projected to increase
from 1.2 million in 2000 to 12.5 million in 2010.
The additional tax liability generated from individuals with credits lost
due to AMT is projected to increase from $2.4 billion in 2000 to $11.8
billion in 2010. The number of individuals affected by the loss of credits
is projected to increase from 200,000 in 2000 to 9.4 million in 2010. Of
this increase, about 4.9 million of the 9.4 million taxpayers were expected
to incur both a direct AMT tax liability and a reduction in their ability to
use tax credits.
REASONS FOR THE AMT INCREASES The projected increase in AMT coverage is, for
the most part, attributable to inflation (the regular tax system is indexed
for inflation but the AMT is not) and to the scheduled expiration of
legislation temporarily excluding some tax credits (such as child tax
credits) from AMT rules.
8 AMT Is Not Indexed for Inflation
In the regular income tax system, the personal exemptions, standard
deduction, and tax rate brackets increase based on inflation. Under AMT,
however, the exemption amounts, the threshold phase- out amounts for these
exemption amounts, and the AMT rate brackets remain constant.
The lack of inflation indexing in AMT causes taxpayers' AMT liabilities to
increase faster than their regular tax liabilities. Real income growth-
growth above inflation- will increase both regular tax and AMT liabilities.
However, under the regular tax system, income growth due to inflation will
generally not increase regular tax liabilities as a percentage of income
because income is increasing at the same rate, but it will increase AMT
liabilities as a percentage of income. The result is that over time, more
taxpayers will have an AMT liability that exceeds their regular tax
liability as long as there is inflation.
If the AMT parameters were indexed to account for inflation starting in
2000, according to recent research at Treasury (illustrated in fig. 2), the
projected number of taxpayers affected financially by AMT over time would be
relatively constant and significantly less than under current law. 20 The
number of individuals affected by an inflation- adjusted AMT is estimated at
2.1 million in 2010 compared to 17 million under current law.
Increases Attributable to Expiration of Tax Credit Legislation In 2001,
legislation that was enacted to temporarily exclude personal credits from
limitation under the AMT rules is scheduled to expire. 21 Recent research at
Treasury estimated that the number of taxpayers with reduced credits would
increase from 200,000 in 2001 (the last year of the personal credits
exclusion) to 2 million in 2002 and would rise to 9.4 million in 2010.
According to JCT, the recently enacted child and education credits are
expected to be affected the most. 22
If personal tax credits were permanently excluded from the AMT rules, the
projected number of taxpayers affected financially by AMT and the
corresponding revenue generated would also be lower than under current law.
23 As figure 2 shows, recent research at Treasury estimated that under this
scenario, about 13.4 million taxpayers would be affected by AMT in 2010
compared to 17 million under current law.
AMT HAS A NUMBER OF IMPACTS AMT has a number of impacts, including increased
compliance burden on taxpayers; increased administrative costs on IRS;
redistribution of the tax burden among taxpayers; changed economic
incentives in the tax system; and the potential to neutralize, for some
20 Under this scenario, personal tax credits would be limited by the AMT
rules beginning in 2002. 21 See footnote 18. 22 The Child Credit, the HOPE
education credit, and the Lifetime Learning Credit are provisions of the
regular income tax that were
enacted in the Taxpayer Relief Act of 1997. 23 This scenario does not
include inflation adjustments for the AMT parameters.
9 taxpayers, changes to the tax system. The projected growth in AMT coverage
would
amplify these impacts. Taxpayer Compliance Burden Although it is difficult
to concretely measure compliance burden, there is common agreement that AMT
can significantly complicate the filing situation for taxpayers. The
National Taxpayer Advocate ranks AMT as one of the most burdensome areas of
tax law. 24
A significant portion of AMT compliance burden is attributable to the
complexity of the AMT rules. AMT requires taxpayers to compute their regular
tax liability and then recompute their AMT liability using a different base
of income, different exemptions, and different tax rates. AMT also applies
different treatments to certain income deductions, exclusions, and credits
that may be used by taxpayers under the regular income tax. As a result,
affected taxpayers are required to apply two methods of accounting to some
of these items– one for the regular tax and one for AMT.
According to IRS and Treasury officials, the complexity of calculating AMT
liability can be most problematic for married taxpayers who consider filing
separately. AMT, like the regular tax, establishes procedures that are
intended to minimize or eliminate that ability of some taxpayers to allocate
income arbitrarily between spouses to reduce their tax liability. If married
taxpayers were to follow all recommended procedures, they would have to
compute their taxes four different ways. First, they would need to compute
their regular tax as if they were filing jointly and then again as if filing
separately. Then they would need to determine their AMT tax as if filing
jointly and then again as if they were filing separately. From these
computations, the taxpayers could then determine which filing method would
be most appropriate for them.
IRS Administrative Costs The complexity of AMT and increases in the number
of taxpayers affected also would complicate IRS' efforts to administer the
federal tax system. According to IRS, AMT is more than just an add- on to
the existing tax system. AMT involves much more than just annually
processing the AMT returns filed by taxpayers such as computer- checking
calculations on the returns and crediting the taxpayers' accounts with the
payments. Some aspects of compliance with AMT rules can be verified only
through office or field audits. According to IRS, the frontline employees
who do such verification work consistently rank AMT as one of the most
complex provisions with which they deal.
Redistribution of Tax Burden As shown in figures 3 and 4, recent research at
Treasury indicated that AMT coverage, absent any legislative change, will
shift from mostly higher income taxpayers in 2000 to increasingly more
middle- income taxpayers by 2010.
24 FY 1999 National Taxpayer Advocate's Annual Report to Congress, IRS
Publication 2104 (Rev. 12- 99).
10 The recent research at Treasury provides some additional insight into the
shift in the
classes of taxpayers affected by AMT. In 2000, the taxpayers projected to be
affected by AMT are more likely to be higher income families with many
dependents. By 2010, increasingly more middle- income, moderately sized
families are expected to be affected by AMT. For example, the percentage of
taxpayers affected by AMT with incomes between $50,000 and $75,000 and four
personal exemptions is projected to increase from about 1 percent in 2000 to
32 percent in 2010. The primary reason for this change is that for middle
income taxpayers, personal exemptions are projected to be the largest and
most common items to be added back into taxable income under AMT.
Additionally, the state where a taxpayer lives also affects AMT coverage.
The projections indicate that taxpayers living in states with high income
and property taxes are more likely to be affected by AMT than those in
states with low income and property taxes. The apparent driving factor for
this change is that state and local taxes are projected to amount to about
one- half of the total preference items that are added back into the taxable
income for computing AMT tax liability in 2010. (See app. II for additional
information on the proportion of AMT taxpayers by state of residence.)
Figure 3: Distribution of the Number of Taxpayers Financially Affected by
AMT Note: Adjusted gross income is in constant 2000 dollars. Source:
Department of the Treasury, Office of Tax Analysis Working Paper 87 (June
2000)
Number of AMT Taxpayers (in millions) Numbers of AMT
Taxpayers (in millions)
7.5 7 6.5 6 5.5 5 4.5 4 3.5 3 2.5 2 1.5 1 0. 5 0 0 0. 5 1 1. 5 2 2. 5 3 3. 5
4 4. 5 5 5. 5 6 6. 5 7 7. 5 Less than $0
$0 - $14,999 $30,000 - $49, 999 $50,000 - $74, 999 $75,000 - $99, 999 $100,
000 - $199,999 $200, 000 or more $15,000 - $29, 999
Adjusted gross income 2000 2010
11 Figure 4: Distribution of the Additional AMT Tax Liability
Note: Adjusted gross income is in constant 2000 dollars. Source: Department
of the Treasury, Office of Tax Analysis Working Paper 87 (June 2000)
Changed Economic Incentives Through its different definition of taxable
income and tax rate structure, AMT may affect the economic incentives
created by the regular income tax. 25 If AMT coverage increases over the
next 10 years as projected, more taxpayers will face those affected
incentives. Two examples follow.
According to JCT, AMT adjustments, preference items, and credit limitations
may reduce incentives for taxpayers to undertake certain investments and
activities that are favored under the regular tax. For example,
unincorporated business owners' incentives to invest may be reduced because
AMT rules regarding depreciation are less generous than under the regular
tax. Also, if education credits become limited by AMT because the moratorium
on the use of personal credits expires, taxpayers may have less incentive to
pursue educational opportunities that qualify for these credits.
Additionally, the current 26- and 28- percent tax rates under AMT are
generally lower than the tax rates a taxpayer faces under the regular tax.
Lower marginal tax rates- the additional tax owed from earning an additional
dollar of income- decrease the disincentives taxpayers face to work
additional hours or invest additional amounts. The extent to which the
incentives and disincentives affected by AMT lead to changes in taxpayer
behavior and changes in overall economic performance is uncertain.
25 For discussions of the effects of AMT on economic efficiency, see Joint
Committee on Taxation, Present Law and Issues Relating to the Individual
Alternative Minimum Tax (“ AMT”) (JCX- 3- 98), Feb. 2, 1998, and
Michael J. Graetz and Emil Sunley, “Minimum Taxes and Comprehensive
Tax Reform,” in Henry J. Aaron, Harvey Galper, and Joseph A. Pechman,
eds., Uneasy Compromise: Problems of a Hybrid Income- Consumption Tax
(Washington, D. C.: The Brookings Institution, 1988).
Less than $0 $0 - $14, 999
$30,000 - $49, 999 $50,000 - $74, 999 $75,000 - $99, 999 $100,000 - $199,999
$200,000 or more $15,000 - $29, 999
Adjusted gross income
16 14 12 10 8 6 4 2 0 0246810 12 1416
AMT liability (in billions) AMT liability (in billions) 2000 2010
12 Impact on Changes to the Regular Tax
For some taxpayers, AMT has the potential to neutralize future tax changes
designed to provide tax relief in the regular tax system. As I mentioned
before, AMT is a parallel tax system that imposes higher taxes on taxpayers
who have higher AMT liabilities than regular tax liabilities. Thus,
taxpayers who are already subject to AMT would not benefit from reductions
in their regular income tax. 26
Additionally, some taxpayers who pay the regular tax may not receive the
full benefits of cuts in their regular tax. Tax reduction legislation could
reduce the taxes for some individuals below the level of taxes that would be
due under AMT rules.
This concludes my statement. I would be pleased to take any questions you
may have. 26 Similarly, tax changes that increase regular taxes would not
affect those AMT taxpayers whose AMT liability already exceeded the regular
tax increase.
13 Appendix I
Illustrations Depicting How Individual Taxpayers May Have Their Taxes
Increased by AMT in 2000 27
Illustration 1: A large family (husband, wife, and six children) had wage
earnings of $80,000 in 2000. In filing their 2000 tax return, the family
would not benefit from itemizing deductions because they rented a house and
had no other significant tax deductions. The family was eligible to take the
standard deduction, personal exemptions, and child tax credit. Under the
regular income tax, the family's tax liability would be $5,377 ($ 8,377 in
income tax less a $3,000 child tax credit), or about 11 percent of their
$50,250 taxable income ($ 80,000 in wages less the standard deduction of
$7,350 and personal exemptions of $22,400).
Under current tax law, AMT would cause this family's tax liability to
increase 13 percent above its tax liability under the regular income tax.
After computing AMT, the family's tax liability would be $6,100 ($ 9,100 in
taxes less $3,000 child tax credit). The $9,100 tax liability results from
AMT tax rules that require the family to recompute taxable income
(essentially add back the standard deduction and personal exemptions to
taxable income computed under the regular tax), then reduce that taxable
income by a $45,000 exemption amount and then apply a 26- percent tax rate
to the remainder.
Illustration 2: A retired couple, age 65, received taxable pension income
totaling $80,000, interest and dividends of $10,000, and distributed capital
gains totaling $125,000 from mutual fund investment in technology stocks in
2000. In filing their 2000 tax return, the couple would not benefit from
itemizing deductions because they had paid off the mortgage on their house
and had no other significant deductions. Under the regular income tax, the
couple's tax liability would be $40,685 or about 20 percent of their
$201,358 taxable income ($ 80,000 in taxable pension income, $10,000
interest and dividends, and $125,000 in capital gains less a standard
deduction of $9,050 and personal exemptions of $4,592).
Under current tax law, AMT would cause this couple's tax liability to
increase about 1 percent above its tax liability under the regular income
tax. After computing AMT, the couple's tax liability would be about $40,925.
The $40,925 tax liability results from AMT tax rules that require the couple
to recompute taxable income (essentially, add back the standard deduction
and personal exemptions to taxable income computed under the regular tax),
then reducing that amount by a $45,000 exemption amount (adjusted down to
$28,750 because of the extent to which the couple's income exceeded the
applicable $150,000 threshold for full use of the exemption). To this
residual amount, AMT provides for applying a 20- percent rate to income
attributable to capital gains and 26 percent to the remainder.
27 These illustrations are based on three hypothetical taxpayers. The extent
to which AMT affects any individual taxpayer depends on the taxpayer's
unique characteristics.
14
Illustration 3: A four- member family (husband, wife, and two children) had
income totaling $265,000 in 2000, comprised of wage earnings totaling
$190,000, interest and dividend earnings of $17,000, and long- term capital
gains of $58,000. Given the nature of the family's expenditures, the family
would benefit from itemizing their deductions when filing their 2000 tax
return. Their itemized deductions would include $23,000 for state and local
income taxes and property taxes, $16,000 for home mortgage interest, and
$6,000 for charitable gifts. Additionally, they are eligible to deduct
$4,704 for personal exemptions. Given the amount of their income, the
regular tax rules limit the family's itemized deductions and personal
exemptions to $45,622. Under the regular income tax, the family's tax
liability would be $52,748, or about 24 percent of its taxable income of
$219,378.
Under current tax law, AMT would cause this family's tax liability to
increase about 2 percent above its tax liability under the regular income
tax. Under AMT rules, the family's tax liability would be about $54,045 on
income of $221,250 (alternative minimum taxable income of $243,000 less a
$45,000 exemption amount reduced to $21,750 because of the extent to which
family income exceeded the applicable $150,000 threshold for full use of the
exemption). Under AMT rules, a 20- percent rate was then applied to income
attributable to capital gains and 26 percent to the remainder.
15 Appendix II
AMT Taxpayers and State of Residence
Under the regular income tax, but not AMT, taxpayers who itemize deductions
are allowed to reduce their tax liability by deducting from their income the
amounts paid to state and local governments for property and income taxes.
States vary in their reliance on different types of taxes. For example, some
rely heavily on sales taxes, which are not deductible under the regular or
AMT, while others rely heavily on income or property taxes, which are
deductible under the regular tax but not AMT.
In recent research at Treasury, an analysis was done to determine the effect
that the payment of state and local income and property taxes had on the
payment of AMT. States were ranked on the basis of the average state and
local tax deductions (analyzed as a percentage of income) that were taken by
taxpayers who itemized deductions and who would continue to itemize if state
and local tax deductions were eliminated. The states were then grouped into
three categories so that the number of taxpayers who reside in the states in
each category would account for approximately one- third of the total number
of taxpayers.
The research at Treasury indicated that, holding other factors constant, AMT
taxpayers are more likely to live in states that rely more heavily on taxes
that are deductible in determining tax liability under the regular income
tax. In the Treasury research it was estimated that, in 2000, 58 percent of
taxpayers affected by AMT lived in high tax deduction states, 24 percent
lived in middle tax deduction states and 18 percent lived in low tax
deduction states. The estimates showed that by 2010, 45 percent of taxpayers
affected by AMT would live in the high tax deduction states, 32 percent
would live in middle tax deduction states, and 22 percent would live in low
tax deduction states. 28 The breakout of states according to the working
paper's categorization is shown in figure 5.
28 The decline was attributed to the increasing affect of another AMT
provision, i. e., personal exemptions as discussed in the section on the
redistribution of the tax burden.
16 Figure 5: States categorized by Deductibility of Their Taxes Under
Federal Income Tax
Law Source: Department of the Treasury, Office of Tax Analysis Working Paper
87 (June 2000) (440033)
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