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The Alternative Minimum Tax 1 (April 2004)

handle is hein.congrec/cbo10313 and id is 1 raw text is: A series ofissue summaries from the Congressional Budget Office No. 4, APRIL 15, 2004 The Alternative Minimum Tax For more than three decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax that was originally intended to im- pose taxes on high-income individuals who have no lia- bility under the regular income tax. The stated purpose of the alternative minimum tax (AMT) is to keep taxpayers with high incomes from paying little or no income tax by taking advantage of various preferences in the tax code. The AMT does so by requiring people to recalculate their taxes under alternative rules that include certain forms of income exempt from regular tax and that do not allow specific exemptions, deductions, and other preferences. For most of its existence, the AMT has affected few tax- payers, less than 1 percent in any year before 2000, but its impact is expected to grow rapidly in coming years and affect about one-fifth of all taxpayers in 2010. In her 2003 report to the Congress, the Internal Revenue Ser- vice's National Taxpayer Advocate, Nina Olson, labeled the AMT the most serious problem faced by taxpayers. Unlike the regular income tax, the AMT is not indexed for inflation. The accumulating effect of inflation is a key source of growing AMT coverage. The expanding reach of the AMT imposes costs beyond higher tax liability. Not only must taxpayers complete the regular income tax returns, but more of them will need to complete the AMT forms, whose definitions of taxable income, deductible expenses, and exemptions differ from those of the regular income tax. The required calculations increase both the complexity and time required to com- ply with tax laws, although computer software may miti- gate those costs. Taxpayers' potential liability for the AMT complicates many of their decisions beyond the tax forms themselves, including when to earn income and when to pay for potentially deductible activities. 1. Internal Revenue Service, National Taxpayer Advocate 2003 Annual Report to Congress (December 31, 2003), p. 5. A range of options could address the growth of the AMT. At one extreme, extending the exemption level in effect for 2004 would postpone the expansion of AMT cover- age. The revenue consequences of doing so would depend on the duration of the extension: extending it just for 2005 would cut revenues by about $18 billion.2 Another option-indexing the AMT parameters for inflation would prevent the alternative tax from growing simply because incomes keep pace with inflation and would lower receipts by $370 billion over the 2005-2014 pe- riod. At the other extreme, eliminating the AMT alto- gether would reduce revenues by nearly $600 billion over the next 10 years under current law.3 Calculating the AMT Technically, the AMT is not an alternative tax. It is de- fined as the addition to regular income taxes, equal to the amount, if any, by which AMT liability exceeds regular tax liability (after applying appropriate credits). Taxpayers who potentially owe AMT must recalculate taxable in- come as defined by the AMT, apply alternative tax rates, allow for credits and other factors, and compare the re- sulting tentative AMT liability against regular tax liabil- ity. Even though the AMT is technically the excess of AMT over regular tax liability, taxpayers effectively calcu- 2. Those and all other estimates of changes in tax receipts reported in this brief are from the Congressional Budget Office. They are based on CBO's economic assumptions through 2014 and derive from CBO's tax model. As a result, they may differ from official revenue estimates that the Joint Committee on Taxation might produce. 3. That revenue cost assumes that the expiration of provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 occurs as scheduled. See Congressional Budget Office, Budget and Economic Outlook: Fiscal Years 2005 to 2014 (January 2004), p. 81. If those tax provisions were made permanent, the cost of repeal would increase by about $300 billion over the 2005-2014 period.

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