This report discusses legislative initiatives regarding the alternative minimum tax (AMT) for individuals, which was originally enacted to ensure that all taxpayers, especially high-income taxpayers, paid at least a minimum amount of federal taxes

Esenwein, Gregg A.

This report describes the Alternative Minimum Tax (AMT), specifically revenue effects of modifying AMT and Legislative Initiatives

Esenwein, Gregg

UNT Digital Library

1 There is also a corporate minimum tax, but it is not addressed in this report.Congressional Research Service ˜ The Library of CongressCRS Report for CongressReceived through the CRS WebOrder Code RS22100Updated September 2, 2005The Alternative Minimum Tax for Individuals:Legislative Initiatives and Their RevenueEffectsGregg EsenweinSpecialist in Public FinanceGovernment and Finance DivisionSummaryThe alternative minimum tax (AMT) for individuals was originally enacted toensure that all taxpayers, especially high-income taxpayers, paid at least a minimumamount of federal taxes.  However, the AMT is not indexed for inflation, and this factor,combined with the recent reductions in the regular income tax, has greatly expanded thepotential impact of the AMT.Temporary provisions intended to mitigate the effects of the AMT expire at the endof 2005.  If this occurs, then the number of taxpayers subject to the AMT will increasefrom 3 million in 2004 to 21 million in 2006.  The Congressional Budget Officeestimates that extending and indexing the 2006 AMT parameters would reduce federalrevenue by $191 billion over the next five years. The conference agreement on the 2006 budget resolution, H.Con.Res. 95, contained$106 billion in tax relief over the next five years, $70 billion of which would beprotected through the reconciliation process.  Under reconciliation, $11 billion of taxrelief is allocated for 2006.  The budget resolution, however,  would not provide enoughtax relief to hold the AMT harmless over the next five years.  To date, 15 stand-alonebills modifying the AMT have been introduced in the 109th Congress.  TheAdministration did not include modifications to the AMT in its FY2006 budgetproposal. This report will be updated as legislative action warrants. The alternative minimum tax (AMT) for individuals was originally enacted to ensurethat all taxpayers, especially high-income taxpayers, paid at least a minimum amount offederal taxes.1  However, absent legislative action, there will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 nearCRS-22 For more detailed information on the AMT see CRS Report RL30149, The AlternativeMinimum Tax for Individuals, by Gregg Esenwein.3 For information on the income levels of taxpayers affected by the AMT in 2006,  see CRSReport RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and “Take Back”Effects, by Gregg Esenwein. future.  In 2004, about 3 million taxpayers were subject to the AMT, but by 2006, up to21 million taxpayers could be subject to the AMT.There are two main reasons for the increase in the number of taxpayers affected bythe AMT.  First, the regular income tax is indexed for inflation, but the AMT is not.  Overtime this has produced a reduction in the differences between regular income taxliabilities and AMT liabilities at any given nominal income level, differences that willcontinue to shrink in the absence of AMT indexation.  The second reason is that the 2001and 2003 reductions in the regular income tax have further narrowed the differencesbetween regular and AMT tax liabilities. The combination of these two factors meansthat, absent legislative changes, there will be significant growth in the number oftaxpayers affected by the AMT.2The 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 $45,000 for joint returns and $35,750 for unmarried taxpayers.3Revenue Effects of Modifying the AMTThe fact that the AMT is poised to affect so many taxpayers in the near future hasprompted calls to remedy the situation.  Absent legislative action, the AMT will “takeback” much of the recently enacted reductions in the regular income tax for millions oftaxpayers.  Because personal exemptions are not allowed against the AMT, large familieswill be particularly susceptible to the AMT.  In addition, since deductions for state/localtaxes are not allowed against the AMT, taxpayers who itemize and deduct these taxes ontheir regular income tax returns are also likely to be adversely affected by the AMT.However, modifications to the AMT will prove costly in terms of forgone revenue.When discussing the long-run (beyond 2010) revenue implications of modifying theAMT, it is critical to specify whether it is assumed that the 2001/2003 tax cuts areallowed to expire after 2010 as scheduled or whether it is assumed that the tax cuts areextended beyond 2010.  Allowing the 2001 tax cuts to expire as scheduled will reduce thecosts of modifying the AMT.   If the tax cuts are extended beyond 2010, then the costs ofmodifying the AMT will increase dramatically.  Indeed, if the 2001/2003 tax cuts areextended, then, as a rough estimate, the cost of most options for modifying the AMT willalmost double.CRS-3The revenue effects of several modifications to the AMT are shown in Table 1. Table 1.  Revenue Costs of Modifying the AMT(billions of dollars)Policy Option FY06-10FY06-15(2001tax cutsexpire)FY06-15(2001 taxcutsextended)Maintain higher AMT exemption level, indexexemption and bracket amounts $191a $385c $642dAllow AMT taxpayers to take personal exemptionsand either the standard deduction or deductions forstate/local taxes.  (AMT basic exemption reverts toprior law levels)$282b $530b N/AExtended higher AMT level through 2006 $30c  —  — Allow personal exemptions under AMT $176a $343c N/AAllow state/local tax deductions under AMT $228a $423c N/ARepeal the AMT $337a $611c $1,160ea.  Joint Committee on Taxation, Estimated Revenue Effects of Various AMT Options, May 17, 2005,unpublished data that formed the basis for the ten-year estimates in the CBO testimony of May 23,2005.  b. Congressional Budget Office, Budget Options, February 2005, p. 275.c. Congressional Budget Office, CBO Testimony, The Individual Alternative Minimum Tax, May 23, 2005,p. 8.d.  Congressional Budget Office,  The Budget and Economic Outlook: Fiscal Years 2006 to 2015, January2005, p.  8. e. U.S. Department of the Treasury,  Fact Sheet: The Toll of Two Taxes: The Regular Income Tax and theAMT, March 2, 2005.To keep the AMT from affecting more taxpayers in the out years than it will in 2005would, at the least, require maintaining the higher exemption levels and indexing theAMT for inflation.  According to the Congressional Budget Office (CBO), this option,which will almost hold the AMT “harmless,”  will cost $191 billion over the first fiveyears.  It will cost $385 billion over 10 years if the 2001/2003 reductions in the regularincome tax  are allowed to expire as scheduled.  If the 2001/2003 tax cuts are extendedbeyond 2010, then this option would reduce revenues by $642 billion over 10 years.CBO also estimates that allowing AMT taxpayers to take personal exemptions andeither the regular standard deduction or their itemized deductions for state/local taxeswould reduce revenues by $282 billion over the first five years and $530 billion over 10years if the 2001/2003 tax cuts expire as scheduled.  (A 10-year revenue estimate of thispolicy option that includes the interactive effects of extending the 2001/2003 tax cuts isnot available.)Repeal of the AMT would be the most expensive policy option.  According to CBO,repeal of the AMT would reduce federal revenues by approximately $337 billion over fiveCRS-44 These estimates do not include the additional cost that would arise through debt financing ofthese policy options.  These additional costs would be substantial.  For instance, CBO estimatesthat the cost of the debt service associated with maintaining the higher AMT exemption levelsand indexation of the AMT would be $132 billion over a 10-year period.  5 Effective in 2006, certain personal tax credits (for example, the dependent care credit, theHOPE Scholarship and Lifetime Learning credit, and the D.C. homebuyer’s credit) cannot beused to reduce a taxpayer’s regular income tax below their AMT liability.  years and by $611 billion over 10 years if the tax cuts expire as scheduled.  The TreasuryDepartment estimates that if the 2001/2003 tax cuts are extended, then repealing the AMTwould reduce federal revenues by over a trillion dollars between FY2006 and FY2015.4In fact, the Treasury Department has estimated that by 2013, it would be less expensiveto repeal the regular income tax than it would be to repeal the AMT.Legislative Initiatives in the 109th CongressOn March 17, 2005, the House approved its FY2006 budget resolution, H. Con.  Res.95.  The House resolution assumed $106 billion in tax reductions over the next five fiscalyears.  Also on March 17, 2005, the Senate approved its budget resolution, S. Con.  Res.18.  The Senate budget resolution assumed $134 billion in tax reductions over theFY2006 to FY2010 period. The conference agreement on the 2006 budget resolution, H.Con.Res. 95, wasapproved by both chambers on April 28, 2005, and contained $106 billion in tax reliefover the next five years, $70 billion of which would be protected through thereconciliation process.  Under reconciliation, $11 billion of tax relief is allocated for2006.  Although the budget resolution does not identify specific changes to the tax code,it does not provide enough tax relief to hold the AMT harmless over the five-year budgethorizon .  Holding the AMT harmless would require extension and indexation of theincreased AMT exemption levels and extension of the provision allowing taxpayers to usepersonal tax credits against the AMT5.In addition to the budget resolution, 15 stand-alone bills affecting the AMT havebeen introduced in the 109th Congress.S. 1099.  Tax Simplification Act of 2005.  Introduced on May 5, 2005, by Senator RichardShelby.  This bill would repeal the AMT.S. 1103. Introduced on May 23, 2005, by Senators Baucus, Grassley, Wyden, Kyl,Schumer, and Crapo.  This bill would repeal the AMT for individuals effective for taxyears beginning after December 31, 2005.S. 1229.   Renewable Energy Incentives Act.  Introduced on June 13, 2005, by SenatorHarry Reid.  This bill would allow the credit for electricity produced from renewableresources against the AMT.S. 1240.   Introduced on June 14, 2005, by Senator Gordon Smith.  This bill would allowa new investment credit for the purchase of trucks with new diesel engine technologiesto be take against the AMT. CRS-5H.R. 206.  Introduced on January 4, 2005, by Representative José Serrano.  This billwould provide a business credit for the use of clean-fuel vehicles by businesses locatedwithin designated areas.  The credit would be allowed against both the regular income taxand the AMT for both individuals and corporations.H.R. 703. The Middle Class Fairness Act of 2005.  Introduced February 9, 2005, byRepresentative Scott Garrett.  This bill would repeal the AMT limitation on the use ofstate and local tax deductions.  It would also index, beginning in 2005, the AMTexemption amount for inflation.H.R. 1091.  Introduced on March 3, 2005, by Representative Phil English.  This billwould allow the work opportunity, welfare-to-work, and the research credit against theAMT.H.R. 1186. Alternative Minimum Tax Repeal Act of 2005.  Introduced on March 9, 2005,by Representative Phil English.  This bill would repeal the AMT starting in 2006.H.R. 1538. Introduced April 8, 2005, by Representative Steve Israel.  Increases the AMTexemption to $100,000 for joint returns and $75,000 for all other returns.  Increases theAMT exemption phase-out threshold.  Indexes the AMT exemptions and phase-outthresholds.H.R. 1599. Introduced April 13, 2005, by Representative Jeb Bradley.  Extends andindexes the increased AMT exemption amounts through 2007.H.R. 2950.  The Individual Tax Simplification Act of 2005.  Introduced on June 16, 2005,by Representative Richard Neal.  Among other things, this bill would repeal the AMT.H.R. 2987.  Introduced June 20, 2005, by Representative Robert Andrews.  Allows adeduction for state and local income and property taxes under the AMT. H.R. 3180.  Introduced on June 30, 2005, by Representative Ron Paul.  This bill wouldallow a deduction against the AMT for qualified attorney fees and court costs associatedwith settlements of civil actions.H.R. 3301.  Introduced July 14, 2005, by Representative J.D. Hayworth.  This bill wouldallow a new investment credit for the purchase of trucks with new diesel enginetechnologies to be take against the AMT.H.R. 3385.   AMT Credit Fairness Act of 2005.  Introduced on July 21, 2005, byRepresentative Sam Johnson.  This bill would increase the allowable credit for prior yearAMT liability and make it refundable.Revenue estimates for these  specific legislative initiatives in the 109th Congress arenot available.  CRS-6Administration’s ProposalIn its 2005 budget proposal, the Administration proposed a one-year extension forboth the increased AMT exemption levels and the provision allowing personal credits tooffset AMT tax liability.  Both of these proposals were ultimately enacted as part of theWorking Families Tax Relief Act of 2004.  The Administration also directed the TreasuryDepartment to study and to report back within a year, on long-term solutions to the AMTproblem.In its 2006 budget proposal, the Administration did not address the AMT issue.Subsequent statements by Secretary of the Treasury John Snow indicate that the AMTissue is to be addressed by the tax reform panel appointed by the Administration.Although the tax reform panel has not released its recommendations, it is expected thatany tax reform proposals will be revenue neutral.  If the reform proposal is revenueneutral, and if a long-term AMT solution is to be incorporated into the panel’s reformproposal, then other taxes will have to increase by an amount at least equal to the revenuecost of holding the AMT harmless under the current system.  Hence, the reform proposalwill need to raise $198 to $642 billion over the next five to 10 years to cover theminimum cost of fixing the AMT.

The Alternative Minimum Tax for Individuals: Legislative Initiatives and Their Revenue Effects

1 There is also a corporate minimum tax, but it is not addressed in this report.Congressional Research Service The Library of CongressCRS Report for CongressReceived through the CRS WebOrder Code RS22100Updated July 7, 2005The Alternative Minimum Tax for Individuals:Legislative Initiatives and Their RevenueEffectsGregg EsenweinSpecialist in Public FinanceGovernment and Finance DivisionSummaryThe alternative minimum tax (AMT) for individuals was originally enacted toensure that all taxpayers, especially high-income taxpayers, paid at least a minimumamount of federal taxes.  However, the AMT is not indexed for inflation, and this factor,combined with the recent reductions in the regular income tax, has greatly expanded thepotential impact of the AMT.Temporary provisions intended to mitigate the effects of the AMT expire at the endof 2005.  If this occurs, then the number of taxpayers subject to the AMT will increasefrom 3 million in 2004 to 21 million in 2006.  The Congressional Budget Officeestimates that extending and indexing the 2006 AMT parameters would reduce federalrevenue by $191 billion over the next five years. The conference agreement on the 2006 budget resolution, H.Con.Res. 95, contained$106 billion in tax relief over the next five years, $70 billion of which would beprotected through the reconciliation process.  Under reconciliation, $11 billion of taxrelief is allocated for 2006.  The budget resolution, however,  would not provide enoughtax relief to hold the AMT harmless over the next five years.  To date, seven stand-alonebills (S. 1103, H.R. 206, H.R. 703, H.R. 1186, H.R. 1538, H.R. 1599, and H.R. 2987)modifying the AMT have been introduced in the 109th Congress.  The Administrationdid not include modifications to the AMT in its FY2006 budget proposal. This report will be updated as legislative action warrants. The 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.1  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 nearCRS-22 For more detailed information on the AMT see CRS Report RL30149, The AlternativeMinimum Tax for Individuals, by Gregg Esenwein.3 For information on the income levels of taxpayers affected by the AMT in 2006,  see CRSReport RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and “Take Back”Effects, by Gregg Esenwein. future.  In 2004, about 3 million taxpayers were subject to the AMT, but by 2006, up to21 million taxpayers could be subject to the AMT.There are two main reasons for the increase in the number of taxpayers affected bythe AMT.  First, the regular income tax is indexed for inflation, but the AMT is not.  Overtime this has produced a reduction in the differences between regular income taxliabilities and AMT liabilities at any given nominal income level, differences that willcontinue to shrink in the absence of AMT indexation.  The second reason is that the 2001and 2003 reductions in the regular income tax have further narrowed the differencesbetween regular and AMT tax liabilities. The combination of these two factors meansthat, absent legislative changes, there will be significant growth in the number oftaxpayers affected by the AMT.2The 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 $45,000 for joint returns and $35,750 for unmarried taxpayers.3Revenue Effects of Modifying the AMTThe fact that the AMT is poised to affect so many taxpayers in the near future hasprompted calls to remedy the situation.  Absent legislative action, the AMT will “takeback” much of the recently enacted reductions in the regular income tax for millions oftaxpayers.  Because personal exemptions are not allowed against the AMT, large familieswill be particularly susceptible to the AMT.  In addition, since deductions for state/localtaxes are not allowed against the AMT, taxpayers who itemize and deduct these taxes ontheir regular income tax returns are also likely to be adversely affected by the AMT.However, modifications to the AMT will prove costly in terms of forgone revenue.When discussing the long-run (beyond 2010) revenue implications of modifying theAMT, it is critical to specify whether it is assumed that the 2001/2003 tax cuts areallowed to expire after 2010 as scheduled or whether it is assumed that the tax cuts areextended beyond 2010.  Allowing the 2001 tax cuts to expire as scheduled will reduce thecosts of modifying the AMT.   If the tax cuts are extended beyond 2010, then the costs ofmodifying the AMT will increase dramatically.  Indeed, if the 2001/2003 tax cuts areextended, then, as a rough estimate, the cost of most options for modifying the AMT willalmost double.The revenue effects of several modifications to the AMT are shown in Table 1. CRS-3Table 1.  Revenue Costs of Modifying the AMT(billions of dollars)Policy Option FY06-10FY06-15(2001tax cutsexpire)FY06-15(2001 taxcutsextended)Maintain higher AMT exemption level, indexexemption and bracket amounts $191a $385c $642dAllow AMT taxpayers to take personal exemptionsand either the standard deduction or deductions forstate/local taxes.  (AMT basic exemption reverts toprior law levels)$282b $530b N/AExtended higher AMT level through 2006 $30c -- --Allow personal exemptions under AMT $176a $343c N/AAllow state/local tax deductions under AMT $228a $423c N/ARepeal the AMT $337a $611c $1,160ea.  Joint Committee on Taxation, Estimated Revenue Effects of Various AMT Options, May 17, 2005,unpublished data that formed the basis for the ten-year estimates in the CBO testimony of May 23,2005.b. Congressional Budget Office, Budget Options, February 2005, p. 275.c. Congressional Budget Office, CBO Testimony, The Individual Alternative Minimum Tax, May 23, 2005,p. 8.d.  Congressional Budget Office,  The Budget and Economic Outlook: Fiscal Years 2006 to 2015, January2005, p.  8. e. U.S. Department of the Treasury,  Fact Sheet: The Toll of Two Taxes: The Regular Income Tax and theAMT, March 2, 2005.To keep the AMT from affecting more taxpayers in the out years than it will in 2005would, at the least, require maintaining the higher exemption levels and indexing theAMT for inflation.  According to the Congressional Budget Office (CBO), this option,which will almost hold the AMT “harmless,”  will cost $191 billion over the first fiveyears.  It will cost $385 billion over 10 years if the 2001/2003 reductions in the regularincome tax  are allowed to expire as scheduled.  If the 2001/2003 tax cuts are extendedbeyond 2010, then this option would reduce revenues by $642 billion over 10 years.CBO also estimates that allowing AMT taxpayers to take personal exemptions andeither the regular standard deduction or their itemized deductions for state/local taxeswould reduce revenues by $282 billion over the first five years and $530 billion over 10years if the 2001/2003 tax cuts expire as scheduled.  (A 10-year revenue estimate of thispolicy option that includes the interactive effects of extending the 2001/2003 tax cuts isnot available.)Repeal of the AMT would be the most expensive policy option.  According to CBO,repeal of the AMT would reduce federal revenues by approximately $337 billion over fiveyears and by $611 billion over 10 years if the tax cuts expire as scheduled.  The TreasuryCRS-44 These estimates do not include the additional cost that would arise through debt financing ofthese policy options.  These additional costs would be substantial.  For instance, CBO estimatesthat the cost of the debt service associated with maintaining the higher AMT exemption levelsand indexation of the AMT would be $132 billion over a 10-year period.  5 Effective in 2006, certain personal tax credits (for example, the dependent care credit, theHOPE Scholarship and Lifetime Learning credit, and the D.C. homebuyer’s credit) cannot beused to reduce a taxpayer’s regular income tax below their AMT liability.  Department estimates that if the 2001/2003 tax cuts are extended, then repealing the AMTwould reduce federal revenues by over a trillion dollars between FY2006 and FY2015.4In fact, the Treasury Department has estimated that by 2013, it would be less expensiveto repeal the regular income tax than it would be to repeal the AMT.Legislative Initiatives in the 109th CongressOn March 17, 2005, the House approved its FY2006 budget resolution, H. Con.  Res.95.  The House resolution assumed $106 billion in tax reductions over the next five fiscalyears.  Also on March 17, 2005, the Senate approved its budget resolution, S. Con.  Res.18.  The Senate budget resolution assumed $134 billion in tax reductions over theFY2006 to FY2010 period. The conference agreement on the 2006 budget resolution, H.Con.Res. 95, wasapproved by both chambers on April 28, 2005, and contained $106 billion in tax reliefover the next five years, $70 billion of which would be protected through thereconciliation process.  Under reconciliation, $11 billion of tax relief is allocated for2006.  Although the budget resolution does not identify specific changes to the tax code,it does not provide enough tax relief to hold the AMT harmless over the five-year budgethorizon .  Holding the AMT harmless would require extension and indexation of theincreased AMT exemption levels and extension of the provision allowing taxpayers to usepersonal tax credits against the AMT5.In addition to the budget resolution, seven stand-alone bills affecting the AMT havebeen introduced in the 109th Congress.S. 1103. Introduced on May 23, 2005, by Senators Baucus, Grassley, Wyden, Kyl,Schumer, and Crapo.  This bill would repeal the AMT for individuals effective for taxyears beginning after December 31, 2005.H.R. 206.  Introduced on January 4, 2005, by Representative José Serrano.  This billwould provide a business credit for the use of clean-fuel vehicles by businesses locatedwithin designated areas.  The credit would be allowed against both the regular income taxand the AMT for both individuals and corporations.H.R. 703. The Middle Class Fairness Act of 2005.  Introduced February 9, 2005, byRepresentative Scott Garrett.  This bill would repeal the AMT limitation on the use ofstate and local tax deductions.  It would also index, beginning in 2005, the AMTexemption amount for inflation.CRS-5H.R. 1186. Alternative Minimum Tax Repeal Act of 2005.  Introduced on March 9, 2005,by Representative Phil English.  This bill would repeal the AMT starting in 2006.H.R. 1538. Introduced April 8, 2005, by Representative Steve Israel.  Increases the AMTexemption to $100,000 for joint returns and $75,000 for all other returns.  Increases theAMT exemption phase-out threshold.  Indexes the AMT exemptions and phase-outthresholds.H.R. 1599. Introduced April 13, 2005, by Representative Jeb Bradley.  Extends andindexes the increased AMT exemption amounts through 2007.H.R. 2987.  Introduced June 20, 2005, by Representative Robert Andrews.  Allows adeduction for state and local income and property taxes under the AMT.  Revenue estimates for these  specific legislative initiatives in the 109th Congress arenot available.Administration’s ProposalIn its 2005 budget proposal, the Administration proposed a one-year extension forboth the increased AMT exemption levels and the provision allowing personal credits tooffset AMT tax liability.  Both of these proposals were ultimately enacted as part of theWorking Families Tax Relief Act of 2004.  The Administration also directed the TreasuryDepartment to study and to report back within a year, on long-term solutions to the AMTproblem.In its 2006 budget proposal, the Administration did not address the AMT issue.Subsequent statements by Secretary of the Treasury John Snow indicate that the AMTissue is to be addressed by the tax reform panel appointed by the Administration.Although the tax reform panel has not released its recommendations, it is expected thatany tax reform proposals will be revenue neutral.  If the reform proposal is revenueneutral, and if a long-term AMT solution is to be incorporated into the panel’s reformproposal, then other taxes will have to increase by an amount at least equal to the revenuecost of holding the AMT harmless under the current system.  Hence, the reform proposalwill need to raise $198 to $642 billion over the next five to 10 years to cover theminimum cost of fixing the AMT.

Congressional Research Service The Library of CongressCRS Report for CongressReceived through the CRS WebOrder Code RS22100Updated November 25, 2005The Alternative Minimum Tax for Individuals:Legislative Initiatives and Their RevenueEffectsGregg EsenweinSpecialist in Public FinanceGovernment and Finance DivisionSummaryThe alternative minimum tax (AMT) for individuals was originally enacted toensure that all taxpayers, especially high-income taxpayers, paid at least a minimumamount of federal taxes.  However, the AMT is not indexed for inflation, and this factor,combined with the recent reductions in the regular income tax, has greatly expanded thepotential impact of the AMT.Temporary provisions intended to mitigate the effects of the AMT expire at the endof 2005.  If this occurs, then the number of taxpayers subject to the AMT will increasefrom 3 million in 2004 to 21 million in 2006.  The Congressional Budget Officeestimates that extending and indexing the 2006 AMT parameters would reduce federalrevenue by $191 billion over the next five years. The conference agreement on the 2006 budget resolution, H.Con.Res. 95, contained$106 billion in tax relief over the next five years, approximately $70 billion of whichwould be protected through the reconciliation process.  Under reconciliation, $11 billionof tax relief is allocated for 2006.  On November 16, 2005, the Senate FinanceCommittee approved a tax cut reconciliation plan — the Tax Relief Act of 2005 (S.2020) — that would, among other things, extend AMT tax relief through 2006.   Thefull Senate approved S. 2020 on November 18.  On November 15, the Ways and MeansCommittee approved H.R. 4297 which, among other things, would provide partial AMTrelief through a one-year extension of the treatment of nonrefundable personal taxcredits under the AMT.In addition, 15 stand-alone bills modifying the AMT have been introduced in the109th Congress.  The Administration did not include modifications to the AMT in itsFY2006 budget proposal. This report will be updated as legislative action warrants.The alternative minimum tax (AMT) for individuals was originally enacted to ensurethat all taxpayers, especially high-income taxpayers, paid at least a minimum amount ofCRS-21 There is also a corporate minimum tax, but it is not addressed in this report.2 For more detailed information on the AMT see CRS Report RL30149, The AlternativeMinimum Tax for Individuals, by Gregg Esenwein.3 For information on the income levels of taxpayers affected by the AMT in 2006,  see CRSReport RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and “Take Back”Effects, by Gregg Esenwein. federal taxes.1  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.There are two main reasons for the increase in the number of taxpayers affected bythe AMT.  First, the regular income tax is indexed for inflation, but the AMT is not.  Overtime this has produced a reduction in the differences between regular income taxliabilities and AMT liabilities at any given nominal income level, differences that willcontinue to shrink in the absence of AMT indexation.  The second reason is that the 2001and 2003 reductions in the regular income tax have further narrowed the differencesbetween regular and AMT tax liabilities. The combination of these two factors meansthat, absent legislative changes, there will be significant growth in the number oftaxpayers affected by the AMT.2The 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 $45,000 for joint returns and $35,750 for unmarried taxpayers.3Revenue Effects of Modifying the AMTThe fact that the AMT is poised to affect so many taxpayers in the near future hasprompted calls to remedy the situation.  Absent legislative action, the AMT will “takeback” much of the recently enacted reductions in the regular income tax for millions oftaxpayers.  Because personal exemptions are not allowed against the AMT, large familieswill be particularly susceptible to the AMT.  In addition, since deductions for state/localtaxes are not allowed against the AMT, taxpayers who itemize and deduct these taxes ontheir regular income tax returns are also likely to be adversely affected by the AMT.However, modifications to the AMT will prove costly in terms of forgone revenue.When discussing the long-run (beyond 2010) revenue implications of modifying theAMT, it is critical to specify whether it is assumed that the 2001/2003 tax cuts areallowed to expire after 2010 as scheduled or whether it is assumed that the tax cuts areextended beyond 2010.  Allowing the 2001 tax cuts to expire as scheduled will reduce thecosts of modifying the AMT.   If the tax cuts are extended beyond 2010, then the costs ofmodifying the AMT will increase dramatically.  Indeed, if the 2001/2003 tax cuts areextended, then, as a rough estimate, the cost of most options for modifying the AMT willalmost double.The revenue effects of several modifications to the AMT are shown in Table 1. CRS-3Table 1.  Revenue Costs of Modifying the AMT(billions of dollars)Policy Option FY06-10FY06-15(2001tax cutsexpire)FY06-15(2001 taxcutsextended)Maintain higher AMT exemption level, indexexemption and bracket amounts $191a $385c $642dAllow AMT taxpayers to take personal exemptionsand either the standard deduction or deductions forstate/local taxes.  (AMT basic exemption reverts toprior law levels)$282b $530b N/AExtended higher AMT level through 2006 $30c  —  — Allow personal exemptions under AMT $176a $343c N/AAllow state/local tax deductions under AMT $228a $423c N/ARepeal the AMT $337a $611c $1,160ea.  Joint Committee on Taxation, Estimated Revenue Effects of Various AMT Options, May 17, 2005,unpublished data that formed the basis for the ten-year estimates in the CBO testimony of May 23,2005.b. Congressional Budget Office, Budget Options, February 2005, p. 275.c. Congressional Budget Office, CBO Testimony, The Individual Alternative Minimum Tax, May 23, 2005,p. 8.d.  Congressional Budget Office,  The Budget and Economic Outlook: Fiscal Years 2006 to 2015, January2005, p.  8. e. U.S. Department of the Treasury,  Fact Sheet: The Toll of Two Taxes: The Regular Income Tax and theAMT, March 2, 2005.To keep the AMT from affecting more taxpayers in the out years than it will in 2005would, at the least, require maintaining the higher exemption levels and indexing theAMT for inflation.  According to the Congressional Budget Office (CBO), this option,which will almost hold the AMT “harmless,”  will cost $191 billion over the first fiveyears.  It will cost $385 billion over 10 years if the 2001/2003 reductions in the regularincome tax  are allowed to expire as scheduled.  If the 2001/2003 tax cuts are extendedbeyond 2010, then this option would reduce revenues by $642 billion over 10 years.CBO also estimates that allowing AMT taxpayers to take personal exemptions andeither the regular standard deduction or their itemized deductions for state/local taxeswould reduce revenues by $282 billion over the first five years and $530 billion over 10years if the 2001/2003 tax cuts expire as scheduled.  (A 10-year revenue estimate of thispolicy option that includes the interactive effects of extending the 2001/2003 tax cuts isnot available.)Repeal of the AMT would be the most expensive policy option.  According to CBO,repeal of the AMT would reduce federal revenues by approximately $337 billion over fiveyears and by $611 billion over 10 years if the tax cuts expire as scheduled.  The TreasuryDepartment estimates that if the 2001/2003 tax cuts are extended, then repealing the AMTCRS-44 These estimates do not include the additional cost that would arise through debt financing ofthese policy options.  These additional costs would be substantial.  For instance, CBO estimatesthat the cost of the debt service associated with maintaining the higher AMT exemption levelsand indexation of the AMT would be $132 billion over a 10-year period.  5 Effective in 2006, certain personal tax credits (for example, the dependent care credit, theHOPE Scholarship and Lifetime Learning credit, and the D.C. homebuyer’s credit) cannot beused to reduce a taxpayer’s regular income tax below their AMT liability.  would reduce federal revenues by over a trillion dollars between FY2006 and FY2015.4In fact, the Treasury Department has estimated that by 2013, it would be less expensiveto repeal the regular income tax than it would be to repeal the AMT.Legislative Initiatives in the 109th CongressOn March 17, 2005, the House approved its FY2006 budget resolution, H. Con.  Res.95.  The House resolution assumed $106 billion in tax reductions over the next five fiscalyears.  Also on March 17, 2005, the Senate approved its budget resolution, S. Con.  Res.18.  The Senate budget resolution assumed $134 billion in tax reductions over theFY2006 to FY2010 period. The conference agreement on the 2006 budget resolution, H.Con.Res. 95, wasapproved by both chambers on April 28, 2005, and contained $106 billion in tax reliefover the next five years, approximately $70 billion of which would be protected throughthe reconciliation process.  Under reconciliation, $11 billion of tax relief is allocated for2006.  Although the budget resolution does not identify specific changes to the tax code,it does not provide enough tax relief to hold the AMT harmless over the five-year budgethorizon .  Holding the AMT harmless would require extension and indexation of theincreased AMT exemption levels and extension of the provision allowing taxpayers to usepersonal tax credits against the AMT5.On November 8, 2005, Senator Charles Grassley unveiled a tax cut reconciliationplan that would, among other things, extend AMT tax relief through 2006.  On November16, 2005, the Senate Finance Committee approved the tax cut reconciliation plan — theTax Relief Act of 2005 (S. 2020) — that extends AMT tax relief through 2006.  The fullSenate approved the Tax Relief Act of 2005 on November 18.Specifically, this bill includes both an extension of the higher AMT exemption leveland an extension of the treatment of nonrefundable credits against the AMT.  In addition,the bill would also index the AMT exemption level for inflation.  It is estimated that thesechanges would reduce federal revenues by $31 billion.  On November 15, 2005, the Committee on Ways and Means  approved H.R. 4297which, among other things, would provide partial AMT relief through a one-yearextension of the treatment of nonrefundable personal tax credits under the AMT.  Thisbill, however, does not include an extension of the higher AMT exemption amount.  Asa result, it would provide only minimal relief from the expected impact of the AMT in2006.  The provision extending the treatment of nonrefundable credits under the AMT isestimated to cost $2.8 billion.CRS-5In addition to the budget reconciliation tax bills, 15 stand-alone bills affecting theAMT have been introduced in the 109th Congress.S. 1099.  Tax Simplification Act of 2005.  Introduced on May 5, 2005, by SenatorRichard Shelby.  This bill would repeal the AMT.S. 1103. Introduced on May 23, 2005, by Senators Baucus, Grassley, Wyden, Kyl,Schumer, and Crapo.  This bill would repeal the AMT for individuals effective for taxyears beginning after December 31, 2005.S. 1229.  Renewable Energy Incentives Act.  Introduced on June 13, 2005, bySenator Harry Reid.  This bill would allow the credit for electricity produced fromrenewable resources against the AMT.S. 1240.   Introduced on June 14, 2005, by Senator Gordon Smith.  This bill wouldallow a new investment credit for the purchase of trucks with new diesel enginetechnologies to be take against the AMT. H.R. 206.  Introduced on January 4, 2005, by Representative José Serrano.  This billwould provide a business credit for the use of clean-fuel vehicles by businesses locatedwithin designated areas.  The credit would be allowed against both the regular income taxand the AMT for both individuals and corporations.H.R. 703. The Middle Class Fairness Act of 2005.  Introduced February 9, 2005, byRepresentative Scott Garrett.  This bill would repeal the AMT limitation on the use ofstate and local tax deductions.  It would also index, beginning in 2005, the AMTexemption amount for inflation.H.R. 1091.  Introduced on March 3, 2005, by Representative Phil English.  This billwould allow the work opportunity, welfare-to-work, and the research credit against theAMT.H.R. 1186. Alternative Minimum Tax Repeal Act of 2005.  Introduced on March 9,2005, by Representative Phil English.  This bill would repeal the AMT starting in 2006.H.R. 1538. Introduced April 8, 2005, by Representative Steve Israel.  Increases theAMT exemption to $100,000 for joint returns and $75,000 for all other returns.  Increasesthe  AMT exemption phase-out threshold.  Indexes the AMT exemptions and phase-outthresholds.H.R. 1599.  Introduced April 13, 2005, by Representative Jeb Bradley.  Extends andindexes the increased AMT exemption amounts through 2007.H.R. 2950.  The Individual Tax Simplification Act of 2005.  Introduced on June 16,2005, by Representative Richard Neal.  Among other things, this bill would repeal theAMT.H.R. 2987.  Introduced June 20, 2005, by Representative Robert Andrews.  Allowsa deduction for state and local income and property taxes under the AMT. CRS-6H.R. 3180.  Introduced on June 30, 2005, by Representative Ron Paul.  This billwould allow a deduction against the AMT for qualified attorney fees and court costsassociated with settlements of civil actions.H.R. 3301.  Introduced July 14, 2005, by Representative J.D. Hayworth.  This billwould allow a new investment credit for the purchase of trucks with new diesel enginetechnologies to be take against the AMT.H.R. 3385.   AMT Credit Fairness Act of 2005.  Introduced on July 21, 2005, byRepresentative Sam Johnson.  This bill would increase the allowable credit for prior yearAMT liability and make it refundable.Revenue estimates for these  specific legislative initiatives in the 109th Congress arenot available.Administration’s ProposalIn its 2005 budget proposal, the Administration proposed a one-year extension forboth the increased AMT exemption levels and the provision allowing personal credits tooffset AMT tax liability.  Both of these proposals were ultimately enacted as part of theWorking Families Tax Relief Act of 2004.  The Administration also directed the TreasuryDepartment to study and to report back within a year, on long-term solutions to the AMTproblem.In its 2006 budget proposal, the Administration did not address the AMT issue.Subsequent statements by Secretary of the Treasury John Snow indicate that the AMTissue is to be addressed by the tax reform panel appointed by the Administration.Although the tax reform panel has not released its recommendations, it is expected thatany tax reform proposals will be revenue neutral.  If the reform proposal is revenueneutral, and if a long-term AMT solution is to be incorporated into the panel’s reformproposal, then other taxes will have to increase by an amount at least equal to the revenuecost of holding the AMT harmless under the current system.  Hence, the reform proposalwill need to raise $198 to $642 billion over the next five to 10 years to cover theminimum cost of fixing the AMT.

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The Alternative Minimum Tax for Individuals: Legislative Initiatives and Their Revenue Effects

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