CRS Updates Report on Alternative Minimum Tax for Individuals

However, absent legislative action, there will be a significant increase in the number of middle- to upper-middle-income taxpayers affected by the AMT in the near future. In 2006, about 4.2 million taxpayers were subject to the AMT, but by 2007, up to 23 million taxpayers could be subject to the AMT.²

There are two main reasons for the increase in the number of taxpayers affected by the AMT. First, the regular income tax is indexed for inflation, but the AMT is not. Over time this has produced a reduction in the differences between regular income tax liabilities and AMT liabilities at any given nominal income level, differences that will continue to shrink in the absence of AMT indexation. The second reason is that the 2001 and 2003 reductions in the regular income tax have further narrowed the differences between regular and AMT tax liabilities. The combination of these two factors means that, absent legislative changes, there will be significant growth in the number of taxpayers affected by the AMT.³

Since 1998, the effects of the AMT have been mitigated through temporary provisions allowing certain personal tax credits to offset AMT liability and temporary increases in the basic exemption for the AMT. The Tax and Trade Relief Extension Act of 1998, allowed taxpayers to use nonrefundable personal tax credits in full against their regular income tax even though the use of the credits might reduce a taxpayers regular income tax liability below their AMT liability.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) temporarily increased the AMT exemption amounts from $45,000 to $49,000 for joint returns and from $33,750 to $35,750 for unmarried individuals with the changes effective for tax years between 2001 and 2004.

The Job Creation and Worker Assistance Act of 2002 extended the temporary provisions, first enacted in 1998 and then extended in 1999, that allowed individuals to use all personal tax credits against both their regular and AMT tax liabilities. This change was effective through December 31, 2003.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) increased the basic AMT exemption amount to $58,000 for joint returns and to $40,250 for unmarried taxpayers. These increases were in effect for tax years 2003 and 2004. JGTRRA also established that the new maximum tax rate of 15% applicable to capital gains and dividend income under the regular income tax would also apply to the taxation of capital gains and dividend income under the AMT.

The Working Families Tax Relief Act of 2004 (WFTRA) extended through 2005 JGTRRAs increase in the basic AMT exemption amounts. WFTRA also extended the provision allowing nonrefundable personal tax credits to offset both regular and AMT tax liability in full for taxable years 2004 and 2005.

The American Jobs Creation Act of 2004 made several changes to the AMT. It coordinated farmer and fisherman income averaging with the AMT so that the use of income averaging did not push taxpayers into the AMT. It repealed the 90% limitation on the use of the AMT foreign tax credit. The act also allowed the credits for alcohol used as a fuel and electricity produced by renewable resources to be used in full against the AMT.

Legislative Action in the 109th Congress

In May 2006, Congress approved the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) that included a one-year extension (through 2006) of both the AMT's personal-credit and increased-exemption provisions. For 2005, the exemption amount was $58,000 for joint returns and $40,250 for unmarried taxpayers. TIPRA increased the 2006 AMT exemption to $62,550 for joint returns and $42,500 for unmarried taxpayers. According to estimates by the Joint Committee on Taxation, the one-year cost of these AMT provisions was $33.9 billion.

In December 2006, Congress passed the Tax Relief and Health Care Act of 2006. This act included a provision making the AMT tax credit refundable. Under the act, taxpayers can claim an AMT refundable credit amount that is the greater of (1) the lesser of $5,000 or the unused minimum credit, or (2) 20% of the unused minimum credit. The unused credit is the credit attributable to tax years prior to the previous three years. The AMT refundable credit is reduced for taxpayers with adjusted gross incomes in excess of certain threshold amounts. (For joint returns in 2007, the threshold is $234,600). This provision applies to tax years beginning before January 1, 2013.

Absent legislation the basic AMT exemption is scheduled to decrease to $45,000 for joint returns and $35,750 for unmarried taxpayers in 2007. In addition, in 2007, several personal tax credits will not be allowed against the AMT.

Legislative Action in the 110th Congress

The U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007 (H.R. 2206) was enacted on May 25, 2007, and allowed the tax credits for the work opportunity credit and the credit for taxes paid with respect to employee cash tips to be used in full against both the corporate and individual alternative minimum taxes.

On November 9, 2007, the House passed the Temporary Tax Relief Act of 2007 (H.R. 3996). Among other things, this bill would set the 2007 AMT exemption levels at $66,250 for joint returns and $44,350 for single returns. It would also allow nonrefundable personal tax credits to offset AMT tax liability for 2007. Finally, the bill would increase the amount of the refundable AMT tax credit and remove the income phaseouts for the credit. This one-year AMT patch is estimated to cost $50.59 billion. The House-passed legislation included revenue offsets for the AMT patch and the other tax cut extenders included in the bill. On December 6, 2007, the Senate passed its version of H.R. 3996 that included only the one-year patch for the AMT with no revenue offsets or other tax cut extenders.

On December 12, 2007, the House passed the AMT Relief Act of 2007 (H.R. 4351). The AMT provisions are the same as those in H.R. 3996. The revenue offsets in HR. 4351 are similar, but not identical to those in H.R. 3996. H.R. 4351, however, does not include the other tax cut extenders.

Table 1 summarizes additional legislative proposals affecting the AMT introduced in the 110th Congress.

 Table 1. AMT Legislation in the 110th Congress

In its FY2005 budget proposal, the Administration proposed a one-year extension for both the increased AMT exemption levels and the provision allowing personal credits to offset AMT tax liability. Both of these proposals were ultimately enacted as part of the Working Families Tax Relief Act of 2004. In its FY2006 budget proposal, the Administration did not address the AMT issue. Subsequent statements by the Administration indicated that the AMT issue was to be addressed by the tax reform panel appointed by the Administration. In November 2005, the tax reform panel recommended that the AMT be repealed. The Administration's FY2007 budget proposal included a provision to extend, through 2006, the higher AMT exemption levels and a provision allowing nonrefundable personal credits to apply to the AMT.

The Administration's FY2008 budget proposal includes a one-year patch for the AMT. The Administration's proposal would increase the basic AMT exemption to $65,350 for joint returns and to $43,900 for unmarried taxpayers. It would also allow personal tax credits to offset AMT liability in full. These changes would be effective for 2007.

² U.S. Congress. Joint Committee on Taxation. Present Law and Background Relating to the Individual Alternative Minimum Tax, JCX-38-07, June 25, 2007.

³ For more detailed information on which taxpayers will be affected by the AMT, see CRS Report RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and "Take Back" Effects, by Gregg Esenwein; CRS Report RS22200, The Potential Distribution Effects of the Alternative Minimum Tax, by Gregg Esenwein and Steven Maguire; and CRS Report RS22083, Alternative Minimum Taxpayers By State: 2003, 2004, and Projections for 2007, by Gregg Esenwein and Steven Maguire.