Esenwein, Gregg A.

UNT Digital Library

Congressional Research Service ˜ The Library of CongressCRS Report for CongressReceived through the CRS WebOrder Code RS22200July 19, 2005The Potential Distributional Effects of theAlternative Minimum TaxGregg EsenweinSpecialist in Public FinanceGovernment and Finance DivisionSummaryThe alternative minimum tax for individuals (AMT) was originally enacted toensure that high-income taxpayers paid a fair share of the federal income tax.  However,the lack of indexation of the AMT  coupled with the recent reductions in regular incometaxes has greatly expanded the potential impact of this tax.Temporary increases in the AMT exemption are scheduled to expire at the end of2005.  If this occurs, then certain taxpayers will be more adversely affected than others.In general, married taxpayers filing joint returns will be more adversely affected thansingle taxpayers.  In addition, taxpayers with large families will be more adverselyaffected than taxpayers with small families.In terms of income, the largest increase in taxpayers subject to the AMT will occurover adjusted gross income (AGI) ranges of $100,000 to $500,000.  Taxpayers withAGIs between $50,000 and $100,000 will eventually be affected, with the negativeeffects of the AMT growing substantially over time.  Taxpayers with AGIs above$500,000 will not be significantly affected by the expiration of the higher AMTexemption.This report will be updated as legislative action warrants or as new data becomeavailable.     BackgroundThe alternative minimum tax (AMT) for individuals was originally enacted to ensurethat all taxpayers, especially high-income taxpayers, paid at least a minimum amount offederal taxes.  However, absent legislative action, there will be a significant increase inthe number of middle- to upper-middle-income taxpayers affected by the AMT in the nearfuture.  In 2004, about 3 million taxpayers were subject to the AMT, but by 2006, up to21 million taxpayers could be subject to the AMT.CRS-21 For more detailed information on the AMT see CRS Report RL30149, The AlternativeMinimum Tax for Individuals, by Gregg Esenwein.2 In addition to disallowing deductions for state/local taxes, the AMT does not allowmiscellaneous itemized deductions and allows deductions for medical expenses only to the extent(continued...)There are two main reasons for the increase in the number of taxpayers affected bythe AMT.  First, under the regular income tax, the tax brackets, standard deductions, andpersonal exemptions are indexed for inflation.  The AMT tax brackets and basicexemptions are not indexed.  Over time this has produced a reduction in the differencesbetween regular income tax liabilities and AMT liabilities at any given nominal incomelevel, differences that will continue to shrink in the absence of AMT indexation.  Thesecond reason is that the 2001 and 2003 reductions in the regular income tax furthernarrowed the differences between regular and AMT tax liabilities. The combination ofthese two factors means that, absent legislative changes, there will be significant growthin the number of taxpayers affected by the AMT.1The effects of the AMT have been temporarily mitigated through an increase in thebasic exemption for the AMT.  For 2005, the AMT exemption is $58,000 for joint returnsand $40,250 for unmarried taxpayers.  In 2006, the basic AMT exemption is scheduledto decrease to its prior law levels of $45,000 for joint returns and $35,750 for unmarriedtaxpayers.Who Will be Subject to the AMT in the Future?If, in 2006, the basic exemption for the AMT reverts to its lower prior-law levelsthen not only will there be a significant increase in the number of taxpayers subject to theAMT, there will also be a significant change in the types of taxpayers who will be subjectto the AMT.  The potential distributional effects of the AMT are summarized below.   ! Married taxpayers filing joint returns will be more likely to fall under theAMT than will taxpayers filing as singles or heads of households.  Thisoccurs because, in 2001, taxpayers filing joint returns received moregenerous reductions in their regular income tax liabilities than didtaxpayers filing as singles or heads of households.  As a result, at anygiven income level, taxpayers filing joint returns have seen their regularincome tax liabilities reduced to levels that are near or actually belowtheir AMT liabilities.! Larger families will be more likely to fall under the AMT than willsmaller families.  This occurs because personal exemptions, which areallowed under the regular income tax,  are not allowed under the AMT.! Taxpayers who itemize their deductions under the regular income tax andwho have large itemized deductions for state/local taxes will be morelikely to fall under the AMT than will taxpayers who do not itemize theirdeductions or taxpayers who take only small deductions for state/localtaxes.  This occurs because deductions for state/local taxes are notallowed under the AMT.2  Taxpayers in high-tax states who claimCRS-32 (...continued)that they exceed 10% of AGI . 3 See CRS Report RL32942, State and Local Taxes and the Federal Alternative Minimum Tax,by Steven Maguire, and CRS Report RS22083, Alternative Minimum Taxpayers by State, byGregg Esenwein.4 For more information see CRS Report RS21817, The Alternative Minimum Tax (AMT): IncomeEntry Points and “Take Back” Effects, by Gregg Esenwein.itemized deductions for state/local taxes will be more likely to fall underthe AMT than taxpayers in low-tax states who claim little or nodeductions for state/local taxes.  Hence, taxpayers in high-tax states suchas New Jersey, New York, Connecticut, the District of Columbia, andCalifornia will tend to be more adversely affected by the AMT than willtaxpayers in low-tax states such as Tennessee, South Dakota, Alaska,Alabama, and Mississippi.3! In 2006, even taxpayers who do not itemize their deductions on theirregular income tax returns will be subject to the AMT at relativelymodest income levels.  For instance, taxpayers filing joint returns withtwo children (four personal exemptions) will be subject to the AMTwhen their incomes exceed $67,500.  Taxpayers filing joint returns withno children (two personal exemptions) will be subject to the AMT whentheir incomes exceed $76,500.4Table 1 shows the effects of the AMT by adjusted gross income (AGI) levels for2005 through 2010.!  In 2005, taxpayers with AGIs in the $200,000 to $500,000 range are themost affected by the AMT.  Almost 67% of taxpayers in this incomerange have AMT liabilities. ! In 2006 and beyond, taxpayers with AGIs in the $100,000 to $500,000range will be the most affected by the AMT.  By 2010, more than 95%of the taxpayers with AGIs of $100,000 to $200,000 will be subject to theAMT.  Almost 86% of taxpayers with AGIs in the $200,000 to $500,000range will be subject to the AMT.! The number of taxpayers with AGIs in the $50,000 to $100,000 rangewho will fall under the AMT will grow steadily over the 2006 to 2010period.  By 2010, over 66% of the taxpayers in this income range will besubject to the AMT.! The number of very high-income taxpayers (AGIs over $500,000) subjectto the AMT will remain relatively constant over the 2005 through 2010period.CRS-4To reiterate, it is the lack of indexation of the AMT combined with the reductionsin the regular income tax that are the primary factors responsible for producing theseresults for taxpayers with AGIs between $50,000 and $500,000.Table 1.  Taxpayers With AMT Liability by Adjusted Gross Income in2005 DollarsCalendar Years 2005-2010Adjusted Gross Income(000s)2005 2006 2007 2008 2009 2010Less than $50 0.0% 0.4% 0.8% 1.4% 2.2% 3.3%$50 - $100 1.3% 34.6% 42.8% 50.5% 59.0% 65.9%$100 - $200 16.7% 81.1% 86.2% 90.7% 93.0% 95.3%$200 - $500 66.6% 86.9% 85.2% 86.5% 83.5% 85.7%$500 - $1,000 27.5% 30.4% 28.4% 30.7% 28.4% 30.3%Over $1,000 21.2% 23.4% 23.1% 24.9% 23.8% 25.5%All taxpayers 2.1% 11.6% 13.2% 14.7% 16.3% 17.9%Source:  Congressional Budget Office.Why Are Very High-Income Taxpayers Not So Adversely Affectedby the AMT?Although the AMT was originally intended to make sure that high-income taxpayerspaid at least a minimum amount of federal income taxes,  they will not be  the group thatwill be the most adversely affected by the AMT in the future.  There are several reasonswhy high-income taxpayers, especially those with adjusted gross incomes (AGIs) over$500,000, will be less affected by the AMT than their lower-income counterparts.First, for high-income taxpayers, the marginal tax rates they face under the regularincome tax tend to be higher than the marginal tax rates they face under the AMT.  Forexample under the regular income tax, the top two marginal income tax rates are 33% and35%.  The top rate under the AMT is 28%.Second, under the regular income tax, personal exemptions are phased out for high-income taxpayers.  So the fact that personal exemptions are not allowed under the AMTdoes not have a significant effect on high-income taxpayers who do not get personalexemptions under the regular income tax.Third, under the alternative minimum tax, the basic AMT exemption is phased outfor taxpayers filing joint returns when AMT taxable income exceeds $150,000.  Hence,many high-income taxpayers do not get a basic exemption under the AMT.  Therefore,CRS-5the scheduled reduction in the basic AMT exemption will have no effect on their AMTliabilities.Finally, high-income taxpayers generally derive a significant percentage of their totalincome from capital gains and dividend income.  Under both the regular income tax andthe AMT, the tax rate on long-term capital gains and dividend income is limited to amaximum rate of 15%.

The Potential Distributional Effects of the Alternative Minimum Tax

https://digital.library.unt.edu/ark:/67531/metacrs6789/m1/1/high_res_d/RS22200_2005Jul19.pdf

The Potential Distributional Effects of the Alternative Minimum Tax

Abstract

Similar works

Full text

Available Versions

UNT Digital Library