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Individual Alternative Minimum Tax 1 (January 2010)

handle is hein.congrec/cbo8583 and id is 1 raw text is: A series of issuze summaries from the Congressional Budget Office JANUARY 15, 20 10 The Individual Alternative Minimum Tax For the past four decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax, which was intended to impose taxes on high-income individuals who use tax preferences to greatly reduce or eliminate their liability under the regu- lar income tax.' The current version of the alternative tax, the alternative minimum tax (AMT), requires people to recalculate their taxes under rules that include in their taxable income certain types of income that are exempt from the regular income tax and that do not allow certain exemptions, deductions, and other preferences. (For details on the calculation of the AMIT, see Box 1.) That second set of rules raises marginal tax rates (the tax on an additional dollar of income) for some taxpayers; modifies or limits various credits, deductions, and exclusions that apply to regular income taxes; and adds to the complexity of the tax system. For most of its existence, the AMIT has played a minor role in the tax system, accounting for less than 2 percent of individual income tax revenues (or 1 percent of total revenues) and affecting less than 1 percent of taxpayers in any year before 2000.2 Since then, the tax would have reached more and more taxpayers (because, unlike the parameters of the regular income tax, those of the AMIT are not indexed for inflation), but lawmakers have inter- vened each year to slow that expansion. In addition, a 1. From the committee report accompanying the Tax Equity and Fiscal Responsibility Act of 1982: The committee has amended the present minimum tax provisions applying to individuals with one overriding objective: no taxpayer with substantial economic income should be able to avoid all tax liability by using exclusions, deductions, and credits. Tax Equity and Fiscal Responsibility Act of 1982, S. Rpt. No. 97-494, Vol. 1, at 108 (July 12, 1982). 2. For additional historical data, see Joint Committee on Taxation, Present Law and Background Relating to the Individual Alternative Minimum Tax (JCX-10-07), March 5, 2007; and Katherine Lim and Jeff Rohaly, The Individual Alternative Minimum Thx: Histori- cal Data and Projections, Updated October 2009 (Washington, D.C.: Urban-Brookings Tax Policy Center, October 5, 2009). series of reductions in the regular income tax enacted starting in 2001 would have caused even more returns to be subject to the AMT were it not for the series of tempo- rary adjustments (often called patches) that lawmakers made to the alternative tax. The most recent AMIT patch expired at the end of calendar year 2009. Without further adjustments, the impact of the AMIT will expand quickly this year and continue to expand in subsequent years, becoming a more significant source of future revenues. As the reach of the AMT grows under current law, many taxpayers will face a fundamentally altered tax structure. If nothing is changed this year, one in six taxpayers will be affected by the AMIT, paying on average an additional $3,900 in tax, and nearly every married taxpayer with income between $100,000 and $500,000 will owe some alternative tax. Because of the particular tax preferences and exemptions disallowed under the AMIT, that tax structure is more likely to affect married couples, large families, and tax- payers in states with high state and local taxes. As an increasing number of taxpayers incur the AMIT, pressures to permanently reduce, eliminate, or otherwise modify the tax are likely to grow. However, restructuring the AIT to limit its impact would reduce federal reve- nues and alter the distribution of tax burdens. If the resulting revenue losses were offset by other tax increases or spending reductions, some taxpayers would benefit and others would be disadvantaged. If the revenue losses were not offset, federal budget deficits would rise and the cost would be shifted onto future taxpayers. Thc Expanding Scopc of thc AMT If current law remains unchanged, the role of the AMIT in the tax system will expand rapidly over time. With the expiration of a temporary increase in the AI4T's exemp- tion amounts, the number of taxpayers affected by the AMT will jump from 4 million in calendar year 2009 to f

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