CRS Updates Report on AMT for Individuals

The alternative minimum tax (AMT) for individuals was originally enacted to ensure that all taxpayers, especially high-income taxpayers, pay at least a minimum amount of federal taxes. However, the AMT is not indexed for inflation, and this factor, combined with the recent reductions in the regular income tax, has greatly expanded the potential impact of the AMT. Temporary provisions intended to mitigate the effects of the AMT expired at the end of 2006 and Congress worked throughout 2007 to enact an AMT "patch."

The patch for the 2007 tax year, as provided for in the Tax Increase Prevention Act of 2007 (P.L. 110-166), enacted on December 26, 2007, set the AMT exemption levels at $66,250 for joint filers and $44,350 for single filers. As with previous AMT patches, P.L. 110-166 allows nonrefundable personal credits to offset AMT liability. If not for the patch, up to 23 million taxpayers would have been subject to the AMT in 2007.

The AMT exemption amounts for the 2008 tax year revert to $45,000 for joint filers and $33,750 for single filers. Without a patch, roughly 26 million taxpayers will be affected by the AMT in 2008. The Administration's FY2009 budget includes an AMT patch for the 2008 tax year and would allow all personal credits against AMT liability.

The FY2009 budget compromise, S.Con.Res. 70, which includes an offset AMT patch, passed the Senate on June 4, 2008, and the House on June 5, 2008. Earlier, on April 17, 2008, the Senate Finance Committee released legislation, S. 2886, that would extend the AMT patch through 2008 and allow the use of nonrefundable personal credits against AMT liability. S. 2886 does not include offsets. More recently, Senator Baucus unveiled a substitute amendment to H.R. 6049 that would include an AMT patch without an offset and extensions of a variety of expiring tax provisions that would be offset. Motions to proceed to H.R. 6049, however, failed Senate cloture votes on June 10, 2008, and again on June 17, 2008. The AMT patch contained in Senator Baucus's proposed substitute amendment to H.R. 6049 would have generated a $61.8 billion revenue loss. On June 18, 2008, the House Ways and Means Committee approved H.R. 6275, which provides an AMT patch that is offset.

This report will be updated as legislative action warrants.

 Contents

There is to 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. If not for the patch provided in P.L. 110-166, enacted on December 26, 2007, up to 23 million taxpayers would have been subject to the AMT in 2007.² For the 2008 tax year, 25.7 million taxpayers are projected to be affected by the AMT absent congressional action.³

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 reduced 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.⁴

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 taxpayer's regular income tax liability below their AMT liability.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16, 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 (P.L. 107-147) 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 (P.L. 108-27, 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 (P.L. 108-311, WFTRA) extended through 2005 JGTRRA's 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 (P.L. 108-357) 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.

In December 2006, Congress passed the Tax Relief and Health Care Act of 2006 (P.L. 109-432). 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.

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. The Tax Increase Prevention Act of 2007 (P.L. 110-166), enacted on December 26, 2007, set the AMT exemption levels at $66,250 for joint filers and $44,350 for single filers and allows nonrefundable personal credits to offset AMT liability. Table 1 presents an abbreviated chronology of the legislative action resulting in the AMT patch (P.L. 110-166) for the 2007 tax year; Table 2 does the same for the 2008 tax year. Table 3 summarizes all legislative proposals affecting the AMT introduced in the 110th Congress.

 Table 1. Votes on the 2007 Patch for the Alternative Minimum

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 Joint Committee on Taxation, June 25, 2007.

⁴ 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 Steven Maguire; and CRS Report RS22083, Alternative Minimum Taxpayers By State: 2004, 2005, and Projections for 2008, by Steven Maguire.

⁵ U.S. Congress, Joint Committee on Taxation, "Estimated revenue Effects of the Conference Agreement for the 'Tax Increase Prevention and Reconciliation Act of 2005,'" JCX-18-06, May 9, 2006.

⁶ U.S. Congress, Senate Finance Committee, "Baucus Bill Extends Energy Incentives, Individual and Business Tax Relief, Blocks Alternative Minimum Tax for Millions of Working Families," News Release, June 10, 2008.