CRS Gauges Effect of Alternative Minimum Tax by State
RS22083
- AuthorsEsenwein, Gregg A.
- Institutional AuthorsCongressional Research Service
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-12850
- Tax Analysts Electronic Citation2006 TNT 129-25
CRS Report for Congress
Received through the CRS Web
Order Code RS22083
June 14, 2006
Gregg A. Esenwein
Specialist in Public Finance
Government and Finance Division
Summary
_________________________________________________________________
In 2003, just over 2 million taxpayers were subject to the AMT. By 2004, some 3 million taxpayers were subject to the AMT. New Jersey, New York, Connecticut, the District of Columbia, and California had the highest percentage of taxpayers subject to the AMT. Tennessee, South Dakota, Alaska, Alabama, and Mississippi had the lowest percentage of taxpayers subject to the AMT.
By 2007, absent legislative change, some 23 million taxpayers will be subject to the AMT. At that time, whether a married taxpayer has itemized deductions for state/local taxes and/or miscellaneous deductions will become a much less important factor in determining AMT coverage than it is at present. This occurs because, whether they itemize their deductions or not, married taxpayers across a wide range of the income spectrum will be subject to the AMT. This report will be updated as legislative action warrants or as new data become available.
The alternative minimum tax for individuals (AMT) was originally enacted to ensure that high-income taxpayers paid a fair share of the federal income tax.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 the regular income tax has greatly expanded the potential impact of the AMT.1
Temporary increases in the AMT exemptions are scheduled to expire at the end of 2006. If this occurs, then the number of taxpayers subject to the AMT will rise from around 3.1 million in 2004 to over 23 million in 2007. Absent legislation, by 2010, some 31 million taxpayers will be subject to the AMT. Taxpayers with incomes in the $100,000 to $500,000 income range will be the hardest hit: 90% of these taxpayers will be subject to the AMT in 2010.
Personal exemptions (22%), itemized deductions for state/local taxes (48%), and miscellaneous itemized deductions (20%) together account for over 90% 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/local taxes, 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 2003 and 2004, respectively, the percentage of taxpayers in each state that were subject to the AMT. Of all the states, Tennessee, South Dakota, Alaska, Alabama, and Mississippi had the smallest percentage of taxpayers subject to the AMT. In these five states, only four to five out of every 1,000 taxpayers paid the AMT in 2003. By 2004, the number of AMT taxpayers had increased to about six to seven out of every 1,000 taxpayers. These are states in which either many taxpayers have relatively low incomes, or state/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.2
On the other hand, New Jersey, New York, Connecticut, the District of Columbia, and California were the states with the largest percentage of taxpayers subject to the AMT. For instance, in New Jersey, about 43 out of every 1,000 taxpayers fell under the AMT in 2003. By 2004, about 55 taxpayers out of every 1,000 paid the AMT. In these states, many taxpayers have relatively high incomes and the state/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 pushed into the AMT.
It should be noted that absent legislative change, whether a married taxpayer has itemized deductions for state/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 negative effects of the AMT have 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. The most recent increase in the basic AMT exemption occurred in May 2006 with the enactment of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). Under provisions of this act, the AMT exemption for 2006 was set at $62,550 for joint returns and $42,500 for unmarried taxpayers. In addition, this act allows taxpayers to temporarily use nonrefundable tax credits to offset AMT liability. The Joint Committee on Taxation estimates that these two changes will reduce federal revenues by almost $34 billion. In 2007, the basic AMT exemption is scheduled to decrease to its prior law level of $45,000 for joint returns ($35,750 for unmarried taxpayers), and nonrefundable tax credits will not be allowed to offset AMT liability.
If these temporary patches to the AMT expire at the end of 2006, then in 2007, almost 20 million more taxpayers will be subject to the AMT than was the case in 2004. 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, in 2004, approximately 17,000 taxpayers in Tennessee were subject to the AMT. Thus, Tennessee taxpayers accounted for only 0.54% of the total AMT returns filed in the country that year. However, if that percentage remains constant, and the temporary patches to the AMT expire, then by 2007 up to 128,000 taxpayers in Tennessee could be subject to the AMT.
Table 3 shows the potential number of AMT returns by state in 2007 if the temporary patches to the AMT are allowed to expire. The 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 2007 as it was in 2004.
Table 1. Number of Alternative Minimum Taxpayers by State Tax
Year 2003
(Returns in thousands)
Number of AMT returns as
Rank State returns AMT returns % of total
U.S.A. 131,357 2,359 1.80%
48 Alabama 1,884 10 0.52
49 Alaska 343 2 0.49
35 Arizona 2,285 20 0.90
38 Arkansas 1,122 9 0.79
5 California 15,172 475 3.13
26 Colorado 2,079 23 1.11
3 Connecticut 1,654 61 3.68
23 Delaware 388 5 1.18
4 District of 276 9 3.27
Columbia
34 Florida 7,850 72 0.91
16 Georgia 3,709 54 1.45
25 Hawaii 591 7 1.11
28 Idaho 578 6 1.07
18 Illinois 5,723 81 1.41
41 Indiana 2,817 20 0.71
33 Iowa 1,325 13 0.95
22 Kansas 1,219 15 1.19
29 Kentucky 1,741 18 1.06
42 Louisiana 1,880 13 0.69
15 Maine 615 9 1.52
7 Maryland 2,602 75 2.90
6 Massachusetts 3,052 89 2.92
24 Michigan 4,546 52 1.14
9 Minnesota 2,384 46 1.92
47 Mississippi 1,170 6 0.53
32 Missouri 2,564 26 1.02
30 Montana 434 5 1.04%
21 Nebraska 803 10 1.26
39 Nevada 1,044 8 0.79
20 New Hampshire 635 8 1.28
1 New Jersey 4,082 179 4.38
36 New Mexico 814 7 0.87
2 New York 8,590 357 4.15
17 North Carolina 3,681 53 1.45
46 North Dakota 302 2 0.56
12 Ohio 5,444 97 1.78
37 Oklahoma 1,461 12 0.84
10 Oregon 1,572 29 1.85
19 Pennsylvania 5,772 79 1.37
8 Rhode Island 498 11 2.13
27 South Carolina 1,805 20 1.08
50 South Dakota 357 2 0.43
51 Tennessee 2,565 11 0.42
40 Texas 9,299 69 0.74
31 Utah 970 10 1.03
13 Vermont 302 5 1.61
11 Virginia 3,432 61 1.79
43 Washington 2,809 18 0.65
45 West Virginia 744 5 0.62
14 Wisconsin 2,590 41 1.57
44 Wyoming 241 2 0.63
Source: Department of the Treasury. Internal Revenue Service.
Table 2. Number of Alternative Minimum Taxpayers by State Tax
Year 2004
(Returns in thousands)
Number of AMT returns as
Rank State returns AMT returns % of total
U.S.A. 133,092 3,146 2.4%
47 Alabama 1,910 14 0.73
48 Alaska 345 2 0.69
34 Arizona 2,372 30 1.30
39 Arkansas 1,136 12 1.09
5 California 15,327 606 3.95
26 Colorado 2,110 32 1.51
3 Connecticut 1,665 80 4.82
22 Delaware 395 6 1.63
4 District of 277 11 4.23
Columbia
27 Florida 8,173 118 1.45
16 Georgia 3,782 73 1.93
23 Hawaii 606 9 1.60
29 Idaho 594 8 1.38
15 Illinois 5,762 112 1.94
42 Indiana 2,854 29 1.01
35 Iowa 1,334 17 1.27
24 Kansas 1,229 19 1.56
32 Kentucky 1,757 23 1.35
43 Louisiana 1,869 18 0.97
18 Maine 618 11 1.88
6 Maryland 2,635 102 3.90
7 Massachusetts 3,061 116 3.79
25 Michigan 4,561 69 1.52
10 Minnesota 2,407 57 2.38
47 Mississippi 1,165 7 0.67
33 Missouri 2,585 34 1.33
31 Montana 439 6 1.38%
21 Nebraska 808 13 1.63
37 Nevada 1,092 13 1.23
20 New Hampshire 643 11 1.74
1 New Jersey 4,107 228 5.54
41 New Mexico 827 8 1.06
2 New York 8,625 437 5.06
19 North Carolina 3,769 69 184
46 North Dakota 305 2 0.77
12 Ohio 5,447 120 2.21
40 Oklahoma 1,476 16 1.07
11 Oregon 1,604 37 2.30
14 Pennsylvania 5,811 114 1.97
8 Rhode Island 500 13 2.69
28 South Carolina 1,844 26 1.41
51 South Dakota 362 2 0.59
49 Tennessee 2,606 17 0.67
36 Texas 9,431 118 1.25
30 Utah 996 13 1.38
17 Vermont 306 5 1.92
9 Virginia 3,491 89 2.55
38 Washington 2,860 35 1.23
45 West Virginia 747 6 0.82
13 Wisconsin 2,621 51 1.98
44 Wyoming 243 2 0.86
Source: Department of the Treasury. Internal Revenue Service.
Table 3. Potential AMT Returns by State in 2007
(Returns in thousands)
Potential AMT returns in
State AMT returns in 2004 2007
U.S.A. 3,146 23,000
Alabama 14 102
Alaska 2 17
Arizona 30 226
Arkansas 12 90
California 606 4,434
Colorado 32 234
Connecticut 80 587
Delaware 6 47
District of Columbia 11 85
Florida 118 866
Georgia 73 534
Hawaii 9 71
Idaho 8 60
Illinois 112 819
Indiana 29 212
Iowa 17 124
Kansas 19 140
Kentucky 23 174
Louisiana 18 132
Maine 11 85
Maryland 102 751
Massachusetts 116 848
Michigan 69 507
Minnesota 57 420
Mississippi 7 57
Missouri 34 253
Montana 6 44
Nebraska 13 96
Nevada 13 98
New Hampshire 11 81
New Jersey 228 1,665
New Mexico 8 64
New York 437 3,194
North Carolina 69 509
North Dakota 2 17
Ohio 120 881
Oklahoma 16 116
Oregon 37 270
Pennsylvania 114 837
Rhode Island 13 98
South Carolina 26 190
South Dakota 2 15
Tennessee 17 128
Texas 118 865
Utah 13 100
Vermont 5 43
Virginia 89 651
Washington 35 258
West Virginia 6 45
Wisconsin 51 379
Wyoming 2 15
Source: Calculations by CRS assuming that the ratio of AMT
taxpayers in each state to total AMT taxpayers in the entire country
will remain the same in 2007 as it was in 2004.
1 See CRS Report RL30149, The Alternative Minimum Tax for Individuals, by Gregg Esenwein.
2 This relationship might change given the recent enactment of a temporary provision allowing itemized deductions for state/local sales taxes in lieu of income taxes. See CRS Report RL32781, Federal Deductibility of State and Local Taxes, by Steven Maguire.
END OF FOOTNOTES
- AuthorsEsenwein, Gregg A.
- Institutional AuthorsCongressional Research Service
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-12850
- Tax Analysts Electronic Citation2006 TNT 129-25