CRS Examines Alternative Minimum Tax Projections

The alternative minimum tax (AMT) is a second federal income tax that operates along side the regular income tax. The AMT is intended to ensure that all taxpayers pay at least a minimum amount of tax on income. The AMT disallows or otherwise limits a variety of exemptions and deductions to achieve this objective. Specifically, personal exemptions, itemized deductions for state/local taxes, and miscellaneous itemized deductions account for 96% of the preference items that are subject to tax under the AMT but not subject to tax under the regular income tax. As a result, over certain income ranges, taxpayers who claim itemized deductions for state and local taxes, claim miscellaneous deductions, or have large families are more likely to fall under the AMT than taxpayers who do not have these characteristics.

In 2009, 3.88 million taxpayers were subject to the AMT, a slight decline from 3.95 million taxpayers in 2008. In 2008, New Jersey, Connecticut, the District of Columbia, New York, and Maryland had the highest percentage of taxpayers subject to the AMT. Tennessee, Alaska, South Dakota, Mississippi, and Alabama had the lowest percentage of taxpayers subject to the AMT.

In 2012, absent an increase of the AMT exemption amount, 34.4 million taxpayers will be subject to the AMT. At that time, whether a married taxpayer has itemized deductions for state and local taxes or miscellaneous deductions will become a much less important factor than it is at present in determining AMT coverage. This occurs because, whether they itemize their deductions or not, married taxpayers across a wide range of incomes will be subject to the AMT because personal exemptions are not allowed against the AMT.

The President's FY2012 Budget proposes an alternative budget baseline where the AMT is permanently indexed for inflation based on 2011 parameters. The estimated revenue loss, assuming the tax cuts enacted from 2001 to 2003 are extended for middle income taxpayers, would be $1.55 trillion. The House-approved FY2012 budget resolution, H.Con.Res. 34, provides for the extension of the tax cuts for all taxpayers and lowers the highest bracket for corporations and individuals. H.Con.Res. 34 also provides for patching the AMT for all taxpayers such that the number of taxpayers subject to the AMT is less than or equal to the number affected by it in 2008.

This report will be updated as legislative action warrants or as new data become available.

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Temporary increases in the AMT exemptions expire at the end of 2011. In 2012, the Urban-Brookings Tax Policy Center estimates that 34.4 million taxpayers will be subject to the AMT.² Taxpayers with incomes in the $200,000 to $500,000 income range will be the hardest hit.³

Itemized deductions for state and local taxes (62.7%), personal exemptions (22.4%), and miscellaneous itemized deductions (11.4%) together account for 96% of the preference items that are subject to tax under the AMT but not subject to tax under the regular income tax.⁴ As a result, over certain income ranges, taxpayers who claim itemized deductions for state and local taxes, claim miscellaneous deductions, and/or have large families are more likely to fall under the AMT than taxpayers who do not have these characteristics.

Table 1 and Table 2 show for 2007 and 2008 (the latest state-by-state data), respectively, the percentage of taxpayers in each state that were subject to the AMT. Of all the states, Tennessee, Alaska, South Dakota, Mississippi, and Alabama had the smallest percentage of taxpayers subject to the AMT. In these five states, roughly 1% of taxpayers were on the AMT in 2008. These are states in which either many taxpayers have relatively low incomes, or state and local taxes that are deductible from the federal income tax are relatively low. As a result of the combination of these factors, taxpayers in these states tend not to itemize their deductions and hence, are less likely to be subject to the AMT than taxpayers in other states.⁵

On the other hand, New Jersey, Connecticut, the District of Columbia, New York, and Maryland were the states with the largest percentage of taxpayers subject to the AMT. For instance, in New Jersey, about 62 out of every 1,000 taxpayers fell under the AMT in 2008. In these states, many taxpayers have relatively high incomes and the state and local tax burden is also relatively high. The combination of these factors produces a larger number of itemizers and, consequently, a larger percentage of taxpayers being captured by the AMT.

Note that absent legislative change (an AMT patch), whether a married taxpayer has itemized deductions for state and local taxes and/or miscellaneous deductions will become a less important factor in determining whether taxpayers are subject to the AMT. This will result because, if the AMT is not modified, then across a broad range of the income spectrum all married taxpayers will be subject to the AMT whether they itemize their deductions or not.

The potentially expanding impact of the AMT has been mitigated through temporary increases in the basic exemption for the AMT and temporary changes that allow taxpayers to use nonrefundable personal tax credits to reduce their AMT liabilities. In December 2007, The Tax Increase Prevention Act of 2007 (TIPA, P.L. 110-166) patched the AMT for the 2007 tax year. In October 2008, The Tax Extenders and Alternative Minimum Tax Relief Act (which was included with the Emergency Economic Stabilization Act of 2008, P.L. 110-343), extended the AMT patch for the 2008 tax year.

In the 111^th Congress, P.L. 111-5, The American Recovery and Reinvestment Act of 2009, included a one-year patch for the 2009 tax year. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA, P.L. 111-312), patched the AMT for 2010 and 2011 tax years. Under TRUIRJCA, the 2010 exemptions amounts are $47,450 for individuals and $72,450 for joint filers. For 2011, the exemption amounts increase to $48,450 and $74,450, respectively. In 2012, absent legislative change, the AMT exemption reverts to $45,000 for joint returns ($35,750 for unmarried taxpayers), and some nonrefundable tax credits are not allowed against AMT liability.

Because the AMT patch expires at the end of 2011, in 2012 roughly 34.4 million taxpayers will likely be subject to the AMT if no patch is enacted.⁶ An increase of this magnitude will affect taxpayers in every state, regardless of whether taxpayers in that state itemize and deduct their state/local taxes and/or miscellaneous deductions from their federal tax returns.

For example, 26,873 taxpayers in Tennessee were subject to the AMT in 2008. Thus, Tennessee taxpayers accounted for only 0.68% of the total AMT returns filed in the United States that year. However, if that percentage of total AMT returns remains constant, then in 2010 roughly 171,000 (0.68% times 25.2 million) taxpayers in Tennessee could be affected by the AMT.

Table 3 shows the potential number of AMT returns by state in 2012 if the patch to the AMT is not extended. The CRS calculations are an extrapolation based on the assumption that the ratio of AMT taxpayers in each state to total AMT taxpayers in the entire country will remain the same in 2012 as it was in 2008. The methodology makes assumptions that could be challenged, but still provides a reasonable estimate of the potential impact of the AMT in 2012 absent legislative changes.

The President's FY2012 alternative budget baseline proposes a permanently indexed AMT based on the 2011 parameters. The revenue loss is $1.55 trillion with the assumption that the tax cuts enacted from 2001 to 2003 are also extended for all but the highest income earners.⁷ These proposed tax cuts are not extended to joint filers with income over $250,000, single filers with income over $200,000, and heads of household with income over $225,000. The House-approved FY2012 budget resolution, H.Con.Res. 34, provides for the extension of the tax cuts for all taxpayers and lowers the highest bracket for corporations and individuals. H.Con.Res. 34 also provides for patching the AMT for all taxpayers "to prevent a larger number of taxpayers as compared with tax year 2008 from being subject to the Alternative Minimum Tax or of allowing the use of nonrefundable personal credits against the Alternative Minimum Tax, or both as applicable."

           Table 1. Number of Alternative Minimum Taxpayers

² The estimate was made before the tax cuts were extended through 2012. Urban-Brookings Tax Policy Microsimulation Model (version 0509-06), "T10-0245 -- Number of AMT Taxpayers with and without AMT Patch, 2010- 2012," November 24, 2010. Data available at http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2843.

³ U.S. Congress, Joint Committee on Taxation, "Present Law and Background Data related to the Federal Tax System in Effect for 2010 and 2011," JCX-19-10, March 22, 2010, p. 43.

⁴ U.S. Congress, Joint Committee on Taxation, "Present Law and Background Relating to the Alternative Minimum Tax," JCX-38-07, June 25, 2007, p. 18.

⁵ For more on the deductibility of state and local taxes, see CRS Report RL32781, Federal Deductibility of State and Local Taxes, by Steven Maguire.

⁶ U.S. Congress, Joint Committee on Taxation, "Present Law and Background Data Related to the Federal Tax System in Effect for 2010 and 2011," JCX-19-10, March 22, 2010.

⁷ U.S. Treasury, General Explanation of the Administration's 2012 Budget Proposal, February 2011, p. 145.