Alternative Minimum Tax: An Overview of Its Rationale and Impact on
Individual Taxpayers (Letter Report, 08/15/2000, GAO/GGD-00-180).

Pursuant to a congressional request, GAO provided information on the
alternative minimum tax (AMT) system, focusing on: (1) the rationale for
establishing AMT; (2) how AMT affects taxpayers' tax liability; (3) the
expected increase in AMT coverage and additional tax liability and the
major reasons for the increase; and (4) the impact of the projected
increase in AMT coverage on taxpayers' compliance burden and economic
incentives and on the distribution of the tax burden.

GAO noted that: (1) AMT was created to reduce the ability of individuals
to escape payment of tax on income by using tax preferences available
under the regular tax system; (2) a type of minimum tax was first
enacted in 1969, following congressional testimony by the Secretary of
the Treasury reporting that 155 high-income individuals paid no federal
income tax in 1966; (3) over the intervening years, the minimum tax has
been amended a number of times, producing today's AMT; (4) the
legislative history for AMT indicates that as Congress amended the law,
the overriding objective remained constant; (5) AMT can affect
taxpayers' tax liability in two ways: (a) directly, by imposing an AMT
liability that exceeds their regular tax liability; or (b) indirectly,
by reducing the amount of certain tax credits allowable under the
regular income tax; (6) to date, recent research at the Joint Committee
on Taxation (JCT) and the Department of the Treasury has indicated that
AMT has affected relatively few, mostly higher income, taxpayers and has
generated a relatively small amount of tax liability in addition to the
regular income tax; (7) according to the research at JCT and Treasury,
however, the number of taxpayers affected by AMT and the corresponding
tax liability generated are expected to increase substantially over the
next 10 years; (8) the projected increases in AMT coverage and
additional tax liability are primarily attributable to the following:
(a) unlike the regular tax system, the AMT system is not indexed to
account for inflation; and (b) the legislation that excludes personal
tax credits from AMT rules will expire in 2001; (9) according to
research at Treasury, the annual effects of these two AMT features are
expected to have increasing budgetary significance in future years; (10)
in 2010, AMT's lack of inflation adjustments and limitation of personal
credits are estimated to account for about $24 billion and about $7
billion in additional tax revenues, respectively; (11) the projected
increase in AMT coverage and the complexity of the system would
significantly add to the overall compliance burden on taxpayers and the
administrative burden on the Internal Revenue Service; and (12) AMT's
projected increase would also affect the distribution of taxes among
individuals.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-00-180
     TITLE:  Alternative Minimum Tax: An Overview of Its Rationale and
	     Impact on Individual Taxpayers
      DATE:  08/15/2000
   SUBJECT:  Taxpayers
	     Tax administration
	     Taxes
	     Income taxes
	     Tax credit

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GAO/GGD-00-180

ALTERNATIVE MINIMUM TAX

An Overview of Its Rationale and Impact on Individual Taxpayers

United States General Accounting Office

GAO Report to the Chairman, Committee on Finance, U. S. Senate

August 2000 GAO/ GGD- 00- 180

United States General Accounting Office General Government Division
Washington, D. C. 20548

Page 1 GAO/ GGD- 00- 180 Rationale and Impact of AMT

B- 285738 August 15, 2000 The Honorable William V. Roth, Jr. Chairman,
Committee on Finance United States Senate

Dear Mr. Chairman: This report responds to your request for a nontechnical
primer on the alternative minimum tax (AMT) for individuals, which is
intended to help ensure that high- income individuals do not avoid
significant tax liability. In general, AMT is a separate tax system that
parallels the regular individual income tax system. Under this dual system
of taxation, taxpayers are required to first compute their tax liability
under regular income tax rules and then, if their income or tax payments do
not meet certain tests, they are required to recompute their tax liability
using the AMT rules. Taxpayers are then obligated to pay the greater of the
two.

Although relatively few taxpayers have been affected financially by AMT in
the past, recent research at the Department of the Treasury estimated that
about 17 million taxpayers would pay additional taxes under AMT by 2010.
Given your concerns about the complexity of the AMT rules and the fact that
many more taxpayers would be affected, you asked us to provide a report
summarizing

ï¿½ the rationale for establishing AMT,

ï¿½ how AMT affects taxpayers' tax liability,

ï¿½ the expected increase in AMT coverage and additional tax liability and the
major reasons for the increase, and

ï¿½ the impact of the projected increase in AMT coverage on taxpayers'
compliance burden and economic incentives and on the distribution of the tax
burden.

As agreed with your office, this report is based on our review of the AMT
tax law provisions, legislative history, and materials published by tax law
experts in both the private sector and federal government. We did our work
in Washington, D. C., during June and July 2000 in accordance with generally
accepted government auditing standards.

B- 285738 Page 2 GAO/ GGD- 00- 180 Rationale and Impact of AMT

AMT was created to reduce the ability of individuals to escape payment of
tax on income by using tax preferences (e. g., items excluded from income
subject to tax) 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 high- income individuals 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. The legislative
history for AMT indicates that as Congress amended the law, the overriding
objective remained constant.

AMT can affect taxpayers' tax liability in two ways: (1) directly, by
imposing an AMT liability that exceeds their regular tax liability, or (2)
indirectly, by reducing the amount of certain tax credits allowable under
the regular income tax. After calculating their taxes under the regular
income tax, many taxpayers must complete a series of forms and calculations
to determine if they are affected by AMT. If this exercise shows that they
may be affected by AMT, taxpayers must recalculate their taxable income and
tax liability using rules that differ from the regular income tax. To date,
recent research at the Joint Committee on Taxation (JCT) and Treasury has
indicated that AMT has affected relatively few, mostly higher- income,
taxpayers and has generated a relatively small amount of tax liability in
addition to the regular income tax. According to the research at Treasury,
for example, AMT is expected to affect about 1.3 million taxpayers- about
1.3 percent of all taxable returns- and generate a projected $5.8 billion in
additional tax liability in 2000.

According to the research at JCT and Treasury, however, the number of
taxpayers affected by AMT and the corresponding tax liability generated are
expected to increase substantially over the next 10 years. For example,
according to the research at Treasury, the number of taxpayers affected
financially by AMT is expected to increase from about 1. 3 million in 2000
to 17 million in 2010- almost 16 percent of all taxable returns- and the
additional tax liability generated by AMT is projected to grow from $5.8
billion to $38.2 billion during the same period. Of the projected 17 million
taxpayers affected by AMT in 2010, about 4. 5 million are expected to have
reduced tax credits due to AMT, even though they are not projected to have a
direct AMT liability.

The projected increases in AMT coverage and additional tax liability are
primarily attributable to the following: (1) unlike the regular tax system,
the AMT system is not indexed to account for inflation and (2) the
legislation that excludes personal tax credits from AMT rules will expire in
2001. According to research at Treasury, the annual effects of these two
Results in Brief

B- 285738 Page 3 GAO/ GGD- 00- 180 Rationale and Impact of AMT

AMT features are expected to have increasing budgetary significance in
future years. In 2010, AMT's lack of inflation adjustments and limitation of
personal credits (beginning in 2002) are estimated to account for about $24
billion and about $7 billion in additional tax revenues, respectively.

The projected increase in AMT coverage and the complexity of the system
would significantly add to the overall compliance burden on taxpayers and
the administrative burden on the Internal Revenue Service (IRS). AMT's
projected increase would also affect the distribution of taxes among
individuals. On the one hand, AMT generates taxes from some higherincome
individuals who would otherwise have paid no taxes. On the other hand, it is
projected to shift from affecting mostly higher- income individuals to more
middle- income taxpayers between 2000 and 2010 and may also affect certain
economic incentives created by the regular tax system. Additionally, changes
that reduce taxes under the regular tax system, absent corresponding changes
to AMT, may result in an increase in the number of individuals covered by
AMT and thus partially neutralize the benefits of the tax changes.

We provided copies of a draft of this report to the Secretary of the
Treasury and Commissioner of Internal Revenue for comment. Those comments
are discussed at the end of this letter and mostly involve technical
clarifications. Additionally, Treasury officials suggested that our report
be refocused to emphasize “design” or “structural
flaws” of AMT features and to analyze the extent to which the features
fulfill AMT's purpose. Developing data sufficient to make judgments such as
these was outside the scope of our review, which was to provide a primer (i.
e., a brief introduction) on AMT, including a summary of its rationale and
impact on taxpayers.

In 1969, Congress enacted an add- on minimum tax that served as the
predecessor to the current AMT. It was designed to reduce the ability of
higher income individuals to escape payment of tax on income. Its enactment
followed congressional testimony by the Secretary of the Treasury reporting
that 155 individuals, each with adjusted gross incomes (AGI) above $200,000
(about $1.1 million in fiscal year 2000 dollars) as defined under the
regular tax system, paid no federal income tax in 1966.

Since 1969, the minimum tax has been amended a number of times, most notably
in 1976, 1978, 1982, 1986, 1990, and 1993. Through these amendments, the
minimum tax was changed from essentially a surcharge on certain tax
preference items (i. e., items excluded from taxable income under the
regular tax but taxable under the minimum tax) to a separate tax AMT Was
Designed to

Increase the Likelihood That Higher Income Taxpayers Have Some Tax Liability

B- 285738 Page 4 GAO/ GGD- 00- 180 Rationale and Impact of AMT

system, paralleling the regular income tax, with its own definition of
income subject to tax and its own tax rates.

In general, the changes were enacted to help ensure that all taxpayers with
significant amounts of income pay at least a minimum amount of tax. For
example, the Senate report for the Tax Reform Act of 1986 emphasized that
the overriding objective of the change was to ensure that no taxpayer with
substantial income should be able to avoid significant tax liability by
using tax preferences available under the regular tax system. 1

AMT may affect taxpayers' tax liability in two ways: (1) directly, by
imposing an AMT liability that exceeds their regular tax liability, or (2)
indirectly, by reducing the amount of tax credits allowable under the
regular income tax. To date, AMT has affected relatively few, principally
higher income, individuals and has generated a small percentage of tax
liability in addition to the regular income tax.

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 under the
regular individual income tax system and limits 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. 2 In general, they calculate their regular tax liability and complete a
preliminary AMT worksheet. Then if so indicated by that worksheet, they
calculate their AMT liability, compare the two tax liabilities, and pay the
greater of the two.

1 See S. Rept. No. 313, 99 th Cong., 2d sess., p. 520. 2 This illustration
generally applies to individual taxpayers required to file IRS Form 1040, U.
S. Individual Income Tax Return. AMT Affects

Taxpayers' Tax Liability in Two Ways

AMT Structure and Rules Differ From the Regular Income Tax

B- 285738 Page 5 GAO/ GGD- 00- 180 Rationale and Impact of 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.

Figure 1: Simplified Illustration of Regular Income Tax and AMT

B- 285738 Page 6 GAO/ GGD- 00- 180 Rationale and Impact of AMT

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, taxpayers report various items of income 3 and then

ï¿½ subtract items for determining AGI, 4

ï¿½ subtract the standard or itemized deductions, 5 and

ï¿½ subtract personal exemptions. 6 Next, taxpayers determine their regular
tax liability by applying the appropriate tax rate 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
1999. 7 The regular income tax also provides special tax rates for long-
term capital gains.

Finally, taxpayers may reduce their regular tax liability with certain tax
credits. The AMT rules, however, may limit the use of some credits. 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 be carried over to another tax year. Taxpayers with credits limited by
AMT 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, personal tax credits, such as the child and education
credits, are temporarily excluded from the AMT rules through 2001. 8

3 While generally all income is subject to tax, some types of income are
excluded, such as interest on tax- exempt bonds. 4 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. 5 In 1999, the standard deduction was $4, 300
for single filers; $6, 350 for heads of household; $7, 200 for married,
filing jointly; $3,600 for married, filing separately. 6 Personal exemptions
are based on the number of dependents claimed by a taxpayer. In 1999,
personal exemptions were $2, 750 for each qualifying exemption, subject to
phase- outs based on taxpayer income.

7 The marginal tax rates under the regular income tax are applied to amounts
of taxable income that depend on filing status. E. g., the tax for married
taxpayers filing jointly is 15 percent of the first $43, 050 in taxable
income; $6, 458 plus 28 percent of taxable income between $43, 050 and$ 104,
050; $23, 358 plus 31 percent of taxable income between $104,050 and $158,
550; $40, 433 plus 36 percent of taxable income between $158,550 and $283,
150; and $85,289 plus 39. 6 percent of taxable income over $283, 150.

8 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 First, Taxpayers Calculate Their

Regular Tax Liability

B- 285738 Page 7 GAO/ GGD- 00- 180 Rationale and Impact of AMT

Beginning in 2002, though, these personal credits would be limited by AMT.

As the second step, taxpayers determine whether they may be subject to AMT
as follows.

ï¿½ Taxpayers that claim certain AMT preference items under the regular income
tax that are considered AMT adjustments or preferences are automatically
subject to the AMT rules and are to proceed directly to step 3- calculate
AMT liability. 9

ï¿½ 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.

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. To calculate taxable income under AMT, taxpayers essentially start with
the taxable income amount reported under the regular system and then do the
following.

ï¿½ Add back their personal exemptions that were allowed under the regular
income tax.

ï¿½ 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 only allows for
the deduction of medical expenses

their AMT liability for the single tax year beginning after December 31,
1997. The Ticket to Work and Work Incentives Improvement Act of 1999
extended that provision through 2001.

9 Appendix I 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. Second, Taxpayers Determine

Whether AMT Applies Third, Some Taxpayers Calculate AMT Liability

B- 285738 Page 8 GAO/ GGD- 00- 180 Rationale and Impact of AMT

above 10 percent of AGI. 12 However, AMT does not disallow or adjust all
itemized deductions. For example, AMT does not require taxpayers to add back
certain mortgage interest or charitable contribution deductions to their
taxable income. (See app. I for more details.)

ï¿½ Add other AMT adjustments and preference items taken under the regular
income tax. AMT disallows certain preference items and requires adjustments
to other 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. (For a summary of AMT preference items
and adjustments, see app. I.)

ï¿½ Subtract the AMT exemption amount based on filing status. The AMT
exemption amount, which is subject to phase- out depending on taxpayer
income computed under AMT rules, is generally intended to replace the
personal exemptions and the standard deduction allowed under the regular
income tax. However, the AMT exemption amount is not adjusted to account for
family size. For example, married taxpayers filing jointly may reduce the
AMT taxable income by $45,000. The $45,000 exemption amount is subject to a
phase- out of 25 percent of AMT taxable income in excess of $150,000. 13

ï¿½ 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. 14

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

12 Under the regular income tax, deductions are allowed for medical expenses
in excess of 7.5 percent of AGI. 13 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.

14 For married taxpayers filing separately, AMT applies the 26- percent tax
rate to the first $87, 500 of AMT taxable income and the 28- percent rate on
the excess. AMT also has special rules for taxing capital gains income,
which generally preserves the lower capital gains tax rates of the regular
tax system (e. g., 20- percent tax rate). Fourth, Taxpayers Compare Tax

Liabilities and Check the Use of Certain Tax Credits

B- 285738 Page 9 GAO/ GGD- 00- 180 Rationale and Impact of AMT

credits), they pay their regular tax liability less any allowable credits.
15 As we described earlier, the AMT rules temporarily allow taxpayers to use
personal credits without limitation. 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 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.

The following example depicts how AMT limits general business credits. A
taxpayer has a regular tax liability (before credits) of $5,000, qualifies
for $1,500 in general business credits, and has an AMT liability of $4,000.
The taxpayer does not have a direct AMT liability, but can only take $1,000
in general business credits and not the other $500 because the taxpayer
cannot use credits to reduce the regular tax liability below the AMT tax
liability. As a result, the taxpayer's effective tax liability of $4,000 is
$500 greater than it would have been absent AMT.

According to recent research at JCT and Treasury, AMT currently affects
relatively few taxpayers and generates a relatively small portion of
additional tax liability. 16 However, it does require some taxpayers with
income to remit more in tax than they would otherwise under the regular tax.
For example, recent research at Treasury estimated that AMT would affect
about 1.3 million taxpayers- about 1.3 percent of all taxable returns- and
would generate about $5.8 billion in additional tax liability in 2000. As
shown in table 1, most of the affected taxpayers, both in terms of the
number affected and percentage of AMT taxes paid, have been higher income
individuals, as measured under the regular tax system. Additionally,
according to recent IRS calculations, about 14, 000 taxpayers

15 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.

16 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). AMT Currently Affects

Relatively Few Taxpayers

B- 285738 Page 10 GAO/ GGD- 00- 180 Rationale and Impact of AMT

would not have had any individual income tax liability absent AMT in tax
year 1997.

Adjusted gross income Number of AMT taxpayers a Percentage of AMT

tax liability

Less than $0 b c 0.8 $0-$ 14,999 c 0.1 $15,000–$ 29,999 c 0.2
$30,000–$ 49,999 c 0.4 $50,000–$ 74,999 0.1 2.2 $75,000–$
99,999 0.2 6.5 $100,000–$ 199,999 0.5 22.5 $200,000 or more 0.5 67.4

Total 1.3 100.0

Note: Totals may not sum because of rounding. a In millions.

b An AGI less than 0 can occur due to a loss of some kind, such as a
business loss. c Less than 50,000.

Source: Department of the Treasury, Office of Tax Analysis Working Paper 87
(June 2000).

According to recent research at JCT and Treasury, AMT coverage and tax
liability are projected to increase dramatically between 2000 and 2010. For
example, recent research at Treasury estimated that the number of taxpayers
affected financially by AMT is projected to grow at an average rate of 31
percent per year after 2000, and by 2010, AMT is expected to affect almost
16 percent of all taxable returns and generate about $38 billion in
additional tax liability. The expected increases are primarily attributable
to the fact that, unlike the regular income tax, AMT is not indexed to
account for inflation and that the legislation that excludes personal tax
credits from the AMT rules is set to expire in 2001.

Recent research at Treasury indicated 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.
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.

The projected increase in the number of taxpayers affected financially by
AMT under current law include both those with direct AMT liabilities and
those with reduced tax credits due to AMT. The number of individuals with a
direct AMT liability is projected to increase from 1.2 million in 2000 to

Table 1: Projected AMT Taxpayers and Tax Liability in 2000

AMT Coverage and Tax Liability Are Projected to Increase

Extent of AMT Coverage and Tax Liability Increases

B- 285738 Page 11 GAO/ GGD- 00- 180 Rationale and Impact of AMT

12.5 million in 2010. 17 In addition, the number of individuals with reduced
tax credits due to AMT is projected to increase from 100,000 in 2000 to 4. 5
million in 2010, even though they are not projected to have a direct AMT
liability.

The additional tax liability generated by AMT is projected to increase
rapidly from both taxpayers with a direct AMT liability and those with
reduced credits due to AMT. 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 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 projected increases for the individual AMT are attributable to the fact
that, unlike the regular income tax, the AMT parameters are not indexed to
account for inflation. Additionally, the expiration of legislation that
excludes personal credits from the AMT rules contributes to the projected
increase in AMT coverage and additional tax liability.

In the regular income tax system, the personal exemptions, standard
deduction, and tax rate brackets are indexed for inflation. Under AMT,
however, the exemption amounts, the threshold phase- out amounts for these
exemption amounts, and the AMT rate brackets are not indexed for inflation.

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, income growth due to inflation will generally not increase regular
tax liabilities because of inflation indexing, but it will increase AMT
liabilities. The result is that, over time, more taxpayers will have an AMT
liability that exceeds their regular tax liability, even if inflation
continues to remain relatively low, as it has over the past few years.

Another contributing factor to the projected increases in AMT is the
expiration in 2001 of the legislation that Congress enacted to temporarily
exclude personal credits from limitation under the AMT rules. As we
described earlier, personal tax credits are to be subject to limitation
under the AMT rules beginning in 2002. Recent research at Treasury estimated
that the number of taxpayers with reduced credits would increase from

17 Of the estimated 12. 5 million taxpayers with a direct AMT liability in
2010, 4. 9 million are also projected to have reduced tax credits. Increased
AMT Coverage

Primarily Attributable to the Absence of Inflation Adjustments and
Expiration of Personal Tax Credit Exclusion

B- 285738 Page 12 GAO/ GGD- 00- 180 Rationale and Impact of AMT

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. 18

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. 19 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. This projected
reduction is expected to occur for both taxpayers with a direct AMT
liability and those with reduced credits. Also, if Congress permanently
extended the legislation excluding personal tax credits 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.
20 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.

18 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. 19 Under this scenario, personal tax credits
would be limited by the AMT rules beginning in 2002.

20 This scenario does not include inflation adjustments for the AMT
parameters. Slower Growth Projected

Under an AMT That Is Adjusted for Inflation and That Does Not Limit Tax
Credits

B- 285738 Page 13 GAO/ GGD- 00- 180 Rationale and Impact of AMT

Note: This figure contains a combination of actual and projected data. Pre-
1998 data on the number of taxpayers are actual values, the 1998 data have
both actual and projected components, and the 1999- 2010 data are all
projections.

Source: Department of the Treasury, Office of Tax Analysis Working Paper 87
(June 2000).

As figure 3 shows, the recent research at Treasury also indicated that
indexing AMT to account for inflation and permanently excluding personal
credits from limitation under the AMT rules would have a significant
budgetary impact over time. The projected additional revenues for an
inflation- adjusted AMT (both direct payments and reduced credits) are
expected to grow at a slower rate and account for an amount significantly
less than projected under current law- about $24 billion less in 2010. The
projected additional revenue generated by AMT with personal credits
permanently excluded would be $6.7 billion less than the $38.2 billion
projected under current law in 2010.

Figure 2: Actual and Projected Number of Taxpayers Affected Financially by
AMT

B- 285738 Page 14 GAO/ GGD- 00- 180 Rationale and Impact of AMT

Note: This figure contains a combination of actual and projected data. Pre-
1998 tax liabilities are actual values, the 1998 tax liability has both
actual and projected component, and the 1999- 2010 tax liabilities are all
projections.

Source: Department of the Treasury, Office of Tax Analysis Working Paper 87
(June 2000).

The projected increase in AMT coverage, coupled with the system's
complexity, would add significantly to the overall compliance burden on
taxpayers and the administrative burden on IRS. The projected increases
would also affect the distribution of the tax burden among taxpayers and may
change the economic incentives created by the tax system. Additionally,
under current law, AMT could neutralize future changes to the regular tax
system.

Figure 3: Actual and Projected Additional Tax Liability From AMT

Increased AMT Coverage Would Have a Number of Impacts

B- 285738 Page 15 GAO/ GGD- 00- 180 Rationale and Impact of AMT

As the projected number of individuals affected by the complex AMT rules
increases over time, the overall compliance burden of the tax system on
taxpayers will increase. While 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. 21
Additionally, in a recently released report on tax law complexity, 22 IRS
states that the complex calculations and extensive linkages between forms
and worksheets (as illustrated in fig. 1) associated with AMT impose a
substantial burden on taxpayers. Taxpayers often bear this burden only to
determine that they do not have an AMT liability. According to IRS, of the
4.4 million taxpayers that filed the AMT form, only 20 percent of them were
affected financially by AMT in tax year 1997. Another indicator of AMT
complexity is that 93 percent of the 4.4 million AMT filers used paid
preparers in 1997 compared to about 52 percent of all individuals. 23

A significant portion of AMT compliance burden is attributable to the
complexity of the AMT rules. As we described earlier, AMT is a parallel tax
to the regular income tax. As such, 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
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. The
complexity of the system can lead to uncertainty for taxpayers. For example,
the withholding system on wages- the principal system used by individual
taxpayers to deposit funds with IRS to cover their tax bill- is based on
income and exemptions as defined by the regular tax system, not AMT.

IRS has identified a number of AMT provisions that add to complexity. These
provisions include

ï¿½ special rules for allowing portions of prior- year AMT tax payments to
offset future- year regular tax liability under certain conditions,

21 FY 1999 National Taxpayer Advocate's Annual Report to Congress, IRS
Publication 2104 (Rev. 12- 99). 22 Annual Report from the Commissioner of
the Internal Revenue Service on Tax Law Complexity (June 2000), pp. 19- 29.
23 According to IRS, it is not clear whether the AMT filers used paid
preparers specifically because of AMT. Increased AMT Coverage

Would Affect Taxpayers' Compliance Burden

B- 285738 Page 16 GAO/ GGD- 00- 180 Rationale and Impact of AMT

ï¿½ recalculations of depreciation expenses under AMT rules that differ from
the regular tax, and

ï¿½ additional calculations for married taxpayers who consider filing
separately in order to determine the appropriate amount of tax liability.

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 is most
appropriate for them.

The complexity of AMT and increases in the number of taxpayers affected also
would complicate IRS' efforts to administer the federal tax system. Despite
the frequent involvement of paid preparers in filing AMT returns,
administering AMT does not just involve annually processing over 4 million
AMT returns and crediting taxpayer accounts with the payments. According to
IRS, it responded to about 6,400 calls from taxpayers about AMT issues in
1999 and dealt with errors on about 10 percent of taxpayer returns with a
direct AMT liability.

Moreover, according to IRS, AMT is not an add- on to the existing tax system
that involves just computer- checking calculations on a return. Some aspects
can only be verified through office or field audit. 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.

The increase in AMT coverage would affect how the tax burden is distributed
among taxpayers. On the one hand, AMT requires some taxpayers with income to
remit more in tax than they otherwise would under the regular tax. As
already discussed, about 14,000 taxpayers would not have had any individual
income tax liability without the AMT in tax year 1997. On the other hand, as
shown in table 2, 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.
Increased AMT Coverage

Would Affect IRS Administration

Increased AMT Coverage Would Affect Distribution of Tax Burden

B- 285738 Page 17 GAO/ GGD- 00- 180 Rationale and Impact of AMT

2000 2010 Adjusted gross income a

Number of AMT taxpayers b

Percentage of all taxable

returns AMT

liability c Percentage

of total AMT liability

Number of AMT taxpayers b

Percentage of all taxable

returns AMT

liability c Percentage

of total AMT liability

Less than $0 d e g 0.8 d e 0.1 0.2 $0-$ 14,999 d 0.1 g 0.1 d f g f $15,000-$
29,999 d f g 0.2 0.1 0.7 0.1 0.2 $30,000-$ 49,999 d 0.2 g 0.4 2.1 8.5 1.7
4.6 $50,000-$ 74,999 0.1 0.6 0.1 2.2 4.5 24.3 5.5 14.5 $75,000-$ 99,999 0.2
2.3 0.4 6.5 3.3 32.1 6.0 15.7 $100,000-$ 199, 999 0.5 5.7 1.3 22.5 5.6 44.8
14.3 37.5 $200,000 or more 0.5 20.8 3.9 67.4 1.4 45.2 10.4 27.3

Totals or overall percentages of taxpayers 1.3 1.3 5.8 100.0 17.0 15.7 38.2
100.0

Note: Totals may not sum because of rounding. a In constant dollars.

b In millions, including reduced tax credits. c In billions, including
reduced tax credits. d Less than 50,000 taxpayers. e Greater than 75
percent. f Less than 0. 05 percent. g Less than $50,000

Source: Department of the Treasury, Office of Tax Analysis Working Paper 87
(June 2000).

The recent research at Treasury provided additional insight into the shift
in the classes of taxpayers affected by AMT. In 2000, the projected
taxpayers 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 4 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 in 2010.

Additionally, the state of a taxpayer's residence also affects AMT coverage.
The projections indicate that taxpayers living in states with high taxes are
more likely to be affected by AMT than those in states with low 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.

Table 2: Distribution of Taxpayers Financially Affected by AMT and the
Additional Tax Liability Generated

B- 285738 Page 18 GAO/ GGD- 00- 180 Rationale and Impact of AMT

Through its different definition of taxable income and tax rate structure,
AMT may affect the economic incentives created by the regular income tax. 24
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. 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. For example, while AMT reduces incentives for some taxpayers to
undertake certain investments and activities favored under the regular tax,
it does not affect incentives for all taxpayers. As a result, AMT might
affect which taxpayers undertake tax- favored activities, but might not
greatly affect the total amount of tax- favored activity undertaken in the
economy overall.

AMT, in its current form, could partially neutralize the impact of future
legislative changes to the regular income tax system. As we mentioned
previously, AMT is a parallel system to the regular income tax, but unlike
the latter, it is not indexed for inflation. Thus, the impacts of any
attempts to alter the regular income tax, such as cutting tax rates or
adding new credits, absent corresponding changes to AMT, could be
counteracted either directly or indirectly by AMT. For example,
congressional proposals that would reduce taxable income in the regular
income tax (such as

24 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). Increased AMT Coverage

May Affect Economic Incentives

AMT Could Partially Neutralize Future Changes to the Regular Tax System

B- 285738 Page 19 GAO/ GGD- 00- 180 Rationale and Impact of AMT

marriage tax penalty relief), but do not include corresponding modifications
to the AMT rules, might benefit some individuals, but might also increase
the number of individuals covered by AMT.

On July 25, 2000, we provided a draft of this report for comment to the
Secretary of the Treasury and the Commissioner of Internal Revenue. In lieu
of written comments, officials from IRS' Offices of Chief Counsel and
Strategic Studies verbally advised us that they agreed with the general
description of AMT and suggested some technical clarifications, which we
have incorporated into the report. On August 9, 2000, Treasury's Office of
Tax Analysis (OTA) provided written comments on a draft of this report (see
app. II). OTA officials suggested that our report be refocused to emphasize
the “design” or “structural flaws” of AMT features
and to analyze the extent to which the features fulfill AMT's purpose. To
make such changes would require us to have developed extensive data
sufficient to draw conclusions on whether or not AMT features are
“design or structural flaws” and whether those features, in
operation, fulfill AMT's purpose. Developing such data was outside the scope
of our review, which was to provide a primer (i. e., a brief introduction)
on AMT, including an overview of its rationale and impact on taxpayers. The
Treasury officials also suggested a number of technical clarifications that
we incorporated as appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
the date of this letter. At that time, we will send copies to Senator Daniel
Patrick Moynihan, Ranking Minority Member of your Committee; Representative
Bill Archer, Chairman, and Representative Charles B. Rangel, Ranking
Minority Member, House Committee on Ways and Means; the Honorable Lawrence
H. Summers, Secretary of the Treasury; and the Honorable Charles O.
Rossotti, Commissioner of Internal Revenue. We will also make copies
available to others upon request. Agency Comments

B- 285738 Page 20 GAO/ GGD- 00- 180 Rationale and Impact of AMT

Key contributors to this report are acknowledged in appendix III. If you
have any questions, please contact me or Thomas M. Richards on (202) 512-
9110.

Sincerely yours, James R. White Director, Tax Policy

and Administration Issues

Page 21 GAO/ GGD- 00- 180 Rationale and Impact of AMT

Page 22 GAO/ GGD- 00- 180 Rationale and Impact of AMT

Contents 1 Letter 24 Appendix I Summary of Tax Provisions Affected by AMT
Rules

26 Appendix II Comments From the Department of the Treasury

31 Appendix III GAO Contacts and Staff Acknowledgments

Table 1: Projected AMT Taxpayers and Tax Liability in 2000

10 Table 2: Distribution of Taxpayers Financially Affected

by AMT and the Additional Tax Liability Generated 17 Tables

Figure 1: Simplified Illustration of Regular Income Tax and AMT

5 Figure 2: Actual and Projected Number of Taxpayers

Affected Financially by AMT 13

Figure 3: Actual and Projected Additional Tax Liability From AMT

14 Figures

Abbreviations

AMT alternative minimum tax IRS Internal Revenue Service JCT Joint Committee
on Taxation

Page 23 GAO/ GGD- 00- 180 Rationale and Impact of AMT

Appendix I Summary of Tax Provisions Affected by AMT Rules

Page 24 GAO/ GGD- 00- 180 Rationale and Impact of AMT

Tax provision General treatment under regular tax General treatment under
AMT Preferences under the AMT rules

Percentage depletion a Deduction equal to prescribed percent of gross
income, subject to certain limitations Excess of deduction for percentage
depletion over the

adjusted basis of depletable property is added to AMTI. Preference does not
apply to oil and gas properties. Intangible drilling costs a Deductible
currently Amount by which excess intangible drilling costs

exceed 65 percent of net income is included in AMTI. Excess intangible
drilling costs are the amount that regular tax deductions exceed 10- year
amortization. Preference does not apply to independent producers to extent
AMTI is reduced by 40 percent or less ignoring the tax preference. Private
activity bond interest income a Not included in income Included in income if
bonds issued after August 7,

1986, except for qualified section 501( c)( 3) bonds issued for charitable
organizations. Depreciation or amortization on pre- 1987 property a ACRS
depreciation allowed Excess of regular tax depreciation over straight- line

depreciation added to alternative minimum taxable income (AMTI) Section 1202
exclusion for certain small business stock a 50 percent of gain on sale of
stock of

certain small businesses excluded from income

42 percent of the gain excluded from regular tax is included in AMTI.

Adjustments under the AMT rules

Standard deduction Fixed amount deductible, depending on filing status.
Amounts are indexed for inflation

Disallowed Itemized deductions b

State and local property (real and personal) and income taxes

Fully deductible Disallowed Medical expenses Allowed to the extent that they
exceed 7.5

percent of a taxpayers AGI Allowed to the extent that they exceed 10 percent
of a taxpayers AGI Miscellaneous expenses Deductible to the extent total
exceeds 2

percent of AGI Disallowed

Home mortgage interest a, Qualified residence interest, including interest
on home equity loans, is deductible (subject to certain limits)

Qualified housing interest is deductible; interest on a home mortgage not
used to buy, build, or improve a home is not deductible Investment interest
expense a Deductible to the extent of investment

income Difference between interest deduction for regular tax

and interest deduction calculated under AMT rules is added to AMTI (can be
positive or negative) State income tax refund Included in taxable income if
deducted in

previous year Deducted if included in calculation of regular taxable income
Personal exemptions Fixed amount per dependent is deducted

from income. Amount is indexed for inflation and subject to phase- outs
based on taxpayer income

Disallowed Depreciation of post- 1986 property (real and personal) a
Accelerated cost recovery system using

prescribed recovery periods and 200% declining balance method for 3, 5, 7,
and 10 year classes

Depreciation is recalculated and difference between regular tax depreciation
and AMT depreciation is added to AMTI. For property placed in service after
1986 and before 1/ 1/ 99, alternative depreciation system class lives
(generally longer) and 150% declining balance method (generally slower) is
used. For property placed in service after 12/ 31/ 98, regular tax lives are
used.

Appendix I Summary of Tax Provisions Affected by AMT Rules

Page 25 GAO/ GGD- 00- 180 Rationale and Impact of AMT

Tax provision General treatment under regular tax General treatment under
AMT

Mining exploration and development costs a Deductible currently 10- year
amortization Amortization deduction for pollution control facilities a 60-
month amortization Amortization is recalculated and the difference

between regular tax depreciation and AMT depreciation is added to AMTI. For
facilities placed in service before 1/ 1/ 99, alternative depreciation
system (generally longer lives and straight- line method) is used. For
facilities placed in service after 12/ 31/ 98, regular tax lives and
straight- line method is used. Circulation expenditures a Deductible
currently 3- year amortization Research and experimental expenditures a
Certain expenditures deductible currently 10- year amortization Incentive
stock options a No income on the exercise of option; option

price is basis for future gain or loss Income on exercise equal to excess of
fair market value over option price; fair market value is basis for future
gain or loss Adjusted gain or loss Gain or loss on sale of asset calculated

using regular tax basis Gain or loss calculated using AMT basis

Losses Deductibility limited by at- risk and passive activity loss rules
Losses from tax shelter farm or passive activities are

limited Net operating loss deduction a Can offset 100 percent of taxable
income Limited to 90 percent of alternative taxable income Foreign tax
credit Can offset 100 percent of tax liability on

foreign source income Limited to 90 percent of pre- credit AMT liability

calculated without regard to net operating losses Earned income credit
Refundable– credit claimed can exceed

regular tax liability Reduced by the amount the taxpayers tentative

minimum tax exceeds regular tax liability General business credit
Combination of a number of tax credits;

cannot reduce current- year regular tax below 25 percent of net regular tax
liability that exceeds $25, 000

Cannot reduce regular tax liability below tentative AMT liability

AMT credit Prior- year AMT liability from deferral adjustments and
preferences can be claimed

Prior- year AMT liability cannot reduce current- year AMT liability

a Use of this tax provision automatically requires a taxpayer to compute an
AMT tax liability as depicted in Step 2 of the AMT process (see fig. 1 on p.
5). The worksheet also instructs taxpayers with AMT adjustments from an
estate, trust, electing large partnership or a cooperative to complete the
AMT form. b Certain itemized deductions are subject to phase- outs based on
taxpayer income.

Source: GAO analysis of Internal Revenue Code.

Appendix II Comments From the Department of the Treasury

Page 26 GAO/ GGD- 00- 180 Rationale and Impact of AMT

See p. 19. See comment 2. See p. 19

See p. 11. See comment 1. Note: GAO comments

supplementing those in the report text appear at the end of this appendix.

Appendix II Comments From the Department of the Treasury

Page 27 GAO/ GGD- 00- 180 Rationale and Impact of AMT

See comment 4. See comment 3.

See comment 5. See comment 6.

Appendix II Comments From the Department of the Treasury

Page 28 GAO/ GGD- 00- 180 Rationale and Impact of AMT

See comment 7.

Appendix II Comments From the Department of the Treasury

Page 29 GAO/ GGD- 00- 180 Rationale and Impact of AMT

The following are GAO's comments on the August 9, 2000, letter from the
Department of the Treasury's Office of Tax Analysis (OTA).

1. OTA's letter included an enclosure containing technical comments. We did
not reproduce the enclosure, but we incorporated the technical comments as
appropriate.

2. As OTA suggested, we expanded the discussion of AMT for married taxpayers
to include a description of the rationale for limitations on taxpayers
filing separately under both the regular tax and AMT.

3. OTA suggested that our description of the steps that taxpayers must
undertake to determine their regular tax and AMT liabilities are more
complicated than we describe. It also stated that taxpayers do not actually
compare the difference between their regular tax liability (before most
credits) and their tentative AMT and pay the higher of the two. However,
later on in its letter, OTA states that “On the AMT form, tentative
minimum tax is compared with a taxpayer's regular tax liability (before most
credits) to determine the additional tax liability.” As OTA suggested,
taxpayers calculate their regular tax liability, calculate their tentative
AMT, and if their tentative AMT liability is greater, they add the
difference to their regular tax liability and pay this amount. In effect,
this amount is equal to their tentative AMT and, as such, taxpayers are
paying the greater of their regular tax and AMT as we described. While we
provided a generalized description of this process, it is essentially the
same as OTA described, and they agreed that “the tax paid is exactly
the same as described in GAO's report.” Given that the purpose of the
report is to provide a primer (i. e., a brief introduction) on AMT, we made
no adjustment.

4. OTA commented that OTA Working Paper 87 (June 2000), which we used as a
source for data estimates on the impact of AMT, should not be referred to as
a Treasury study or Treasury research. OTA made this comment because the
views expressed in the report do not necessarily represent the views of the
Treasury Department as indicated by a disclaimer printed on the report.
During the course of our review, responsible OTA officials assured us that
we could refer to the data published in the OTA Working Paper as
“recent research by Treasury.” This was possible because all
estimates contained in the report were made using the Treasury Department's
Individual Tax Model in combination with the administration's economic
forecast from the fiscal year 2001 budget. Accordingly, we cited the data
from the report but not the views expressed by the authors. Thus, we believe
that it is appropriate to characterize the working paper's data estimates as
Treasury research. However, in GAO's Comments

Appendix II Comments From the Department of the Treasury

Page 30 GAO/ GGD- 00- 180 Rationale and Impact of AMT

response to OTA's written comments, we revised the report to clearly
acknowledge the disclaimer and refer to the estimates as “recent
research at Treasury.”

5. As suggested by OTA, the report was revised to distinguish more clearly
between AMT liability and revenue where appropriate.

6. OTA commented that we should describe the liability from the AMT tax
calculation as the tentative AMT and indicate that the AMT liability is the
difference between the tentative AMT and the regular tax. This comment is
essentially the same comment as we discussed in comment 3. As we explained
in comment 3, the bottomline of these calculations is that taxpayers are
liable for paying the greater of the tax computed under the AMT rules or the
regular tax rules. Given that our report provides a generalized description
of AMT, we made no adjustment, that is, we refer to the tax computed under
AMT rules as an AMT liability.

7. As OTA suggested, we adjusted line 8 of table 2 to account for the
collapsing of data into one stratum.

Appendix III GAO Contacts and Staff Acknowledgments

Page 31 GAO/ GGD- 00- 180 Rationale and Impact of AMT

James R. White, (202) 512- 9110 Thomas M. Richards, (202) 512- 9110

In addition to those named above, Daniel Lynch, Ed Nannenhorn, Anne Stevens,
and Cheryl Peterson made key contributions to this report. GAO Contacts

Acknowledgments

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