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CRS Gauges Effect of Alternative Minimum Tax by State

JUN. 14, 2006

RS22083

DATED JUN. 14, 2006
DOCUMENT ATTRIBUTES
  • Authors
    Esenwein, Gregg A.
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2006-12850
  • Tax Analysts Electronic Citation
    2006 TNT 129-25
Citations: RS22083

 

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

 

_________________________________________________________________

 

 

Personal exemptions, itemized deductions for state/local taxes, and miscellaneous itemized deductions account for 90% of the preference items that are subject to tax under the alternative minimum tax (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, or have large families are more likely to fall under the AMT than taxpayers who do not have these characteristics.

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The alternative minimum tax for individuals (AMT) was originally enacted to ensure that high-income taxpayers paid a fair share of the federal income tax.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.

 

FOOTNOTES

 

 

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
DOCUMENT ATTRIBUTES
  • Authors
    Esenwein, Gregg A.
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2006-12850
  • Tax Analysts Electronic Citation
    2006 TNT 129-25
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