CRS Updates Report on Individual AMT
RS22563
- AuthorsEsenwein, Gregg A.Maguire, Steven
- Institutional AuthorsCongressional Research Service
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2007-22389
- Tax Analysts Electronic Citation2007 TNT 194-52
Order Code RS22563
Updated September 27, 2007
Gregg A. Esenwein
Specialist in Public Finance
Government and Finance Division
Steven Maguire
Specialist in Public Finance
Government and Finance Division
Summary
____________________________________________________________________
Temporary provisions intended to mitigate the effects of the AMT will expire at the end of 2006. As a result, the number of taxpayers subject to the AMT will increase from 3.5 million in 2006 to 23 million in 2007. The Congressional Budget Office estimates that extending AMT tax relief would reduce federal revenue by $282 billion over the period FY2007 through FY2011.
On January 4, 2007, Senate Finance Committee Chairman Senator Max Baucus and ranking member Senator Charles Grassley introduced S. 55, legislation that would repeal the AMT effective for tax years after 2006. The conference report to S.Con.Res. 21, the FY2008 budget resolution, calls for a one-year patch for the AMT. This report will be updated as legislative action warrants.
The alternative minimum tax (AMT) for individuals was originally enacted to ensure that all taxpayers, especially high-income taxpayers, pay at least a minimum amount of federal taxes.1 It was designed so that individuals could not take unfair advantage of the various preferences and incentives under the regular income tax to substantially reduce their regular income tax liability below what was considered appropriate for their income level. The AMT functions as a parallel tax system to the regular income tax. Taxpayers calculate their regular income tax and then calculate their AMT. If their AMT liability is larger than their regular income tax liability, then they pay the AMT.
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 would be $33.9 billion.
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.
Table 1 summarizes additional legislative proposals affecting the AMT introduced in the 110th Congress.
Table 1. AMT Legislation in the 110th Congress
_________________________________________________________________
Bill
S. 55
Jan. 4, 2007
Sponsor
Sen. Max Baucus
Sen. Chuck Grassley
Effect on AMT
Repeals the AMT effective for tax years after 2006.
_________________________________________________________________
Bill
S. 102
Jan. 4, 2007
Sponsor
Sen. John Kerry
Effect on AMT
Increases the basic AMT exemption and allows personal tax credits to
offset AMT liability. Offsets part of the cost of these changes by
repealing, in 2009 and 2010, the lower tax rates on dividends and
capital gains income.
_________________________________________________________________
Bill
S. 590
Feb. 14, 2007
Sponsor
Sen. Gordon Smith
Effect on AMT
Allows the investment tax credit for solar energy property and
qualified fuel cell property against the AMT.
_________________________________________________________________
Bill
S. 614
Feb. 15, 2007
Sponsor
Sen. Charles Schumer
Effect on AMT
Increases the basic AMT exemption for tax years 2007 and 2008.
Permits personal tax credits to offset AMT liabilities.
_________________________________________________________________
Bill
S. 734
Mar. 1, 2007
Sponsor
Sen. Arlen Specter
Effect on AMT
Reduces the AMT tax rate to 24%.
_________________________________________________________________
Bill
S. 1040
Mar. 29, 2007
Sponsor
Sen. Richard Shelby
Effect on AMT
Among other things, this bill repeals the AMT.
_________________________________________________________________
Bill
S. 1111
Apr. 16, 2007
Sponsor
Sen. Ron Wyden
Effect on AMT
Among other things, this bill repeals the AMT.
_________________________________________________________________
Bill
S. 14
Apr. 17, 2007
Sponsor
Sen. Jon Kyl
Effect on AMT
Repeals the AMT effective in 2007.
_________________________________________________________________
Bill
S. 1405
May 16, 2007
Sponsor
Sen. Sam Brownback
Effect on AMT
Repeals the individual AMT effective in 2008.
_________________________________________________________________
Bill
S. 1851
July 23, 2007
Sponsor
Sen. Jeff Sessions
Effect on AMT
Indexes the AMT for inflation and allows personal exemptions under
the AMT.
_________________________________________________________________
Bill
S. 1855
July 23, 2007
Sponsor
Sen. Chuck Grassley
Effect on AMT
Provides relief from penalty for failure to pay estimated taxes
attributable to the AMT.
_________________________________________________________________
Bill
S. 1875
July 25, 2007
Sponsor
Sen. Jim DeMint
Effect on AMT
Repeals the AMT effective in 2007.
_________________________________________________________________
Bill
H.R. 370
Jan. 10, 2007
Sponsor
Rep. Geoff Davis
Effect on AMT
Allows certain coal to liquid fuel tax credits to be applied against
the AMT.
_________________________________________________________________
Bill
H.R. 550
Jan. 18, 2007
Sponsor
Rep. Michael McNulty
Effect on AMT
Allows the investment tax credit for solar energy property and
qualified fuel cell property against the AMT.
_________________________________________________________________
Bill
H.R. 1112
Feb. 16, 2007
Sponsor
Rep. Thomas Reynolds
Effect on AMT
Increases the basic AMT exemption to $66,400 for joint returns and
$45,100 for unmarried taxpayers.
Allows personal tax credits to offset AMT liabilities in full.
_________________________________________________________________
Bill
H.R. 1366
Mar. 7, 2007
Sponsor
Rep. Phil English
Effect on AMT
Repeals the AMT starting in 2007.
_________________________________________________________________
Bill
H.R. 1591
Mar. 20, 2007
Sponsor
Rep. David Obey
Effect on AMT
Makes permanent the allowance for the work opportunity tax credit and
the credit for taxes paid with respect to employee tips to offset AMT
liability. Passed by the House and the Senate, but was vetoed by
President Bush on May 1, 2007.
_________________________________________________________________
Bill
H.R. 1869
Apr. 17, 2007
Sponsor
Rep. Nydia Velazques
Effect on AMT
Repeals the AMT starting in 2008.
_________________________________________________________________
Bill
H.R. 1923
Apr. 18, 2007
Sponsor
Rep. Kevin McCarthy
Effect on AMT
Increases and indexes the basic exemption for the AMT.
Increases the point at which the basic exemption is phased-out.
_________________________________________________________________
Bill
H.R. 1942
Apr. 19, 2007
Sponsor
Rep. Scott Garrett
Effect on AMT
Allows deductions for state and local taxes against AMT.
Indexes the basic AMT exemption.
_________________________________________________________________
Bill
H.R. 2253
May 9, 2007
Sponsor
Rep. Edward Royce
Effect on AMT
Reduces the AMT tax rate to 24%.
_________________________________________________________________
Bill
H.R. 2318
May 15, 2007
Sponsor
Rep. Robert Andrews
Effect on AMT
Allows state and local property taxes to be deducted from the
AMT tax base.
_________________________________________________________________
Bill
H.R. 2691
June 12, 2007
Sponsor
Rep. Timothy Walz
Effect on AMT
Allows the tax credit for electricity produced from wind facilities
against the AMT.
_________________________________________________________________
Bill
H.R. 2748
June 15, 2007
Sponsor
Rep. Rodney Frelinghuysen
Effect on AMT
Allows the alternative motor vehicle tax credit against the AMT.
_________________________________________________________________
Bill
H.R. 2776
June 27, 2007
Sponsor
Rep. Charles Rangel
Effect on AMT
Allows certain energy tax credits against the AMT.
_________________________________________________________________
Bill
H.R. 2902
June 28, 2007
Sponsor
Rep. Thomas Allen
Effect on AMT
For 2007 and 2008, increases the AMT exemption and allows all
personal tax credits against the AMT.
_________________________________________________________________
Bill
H.R. 2983
July 10, 2007
Sponsor
Rep. Anthony Weiner
Effect on AMT
Eliminates the AMT for taxpayers with adjusted gross incomes (AGIs)
under $100,000 for unmarried taxpayers and $200,000 for married
taxpayers.
_________________________________________________________________
Bill
H.R. 3486
Sept. 6, 2007
Sponsor
Rep. Brad Ellsworth
Effect on AMT
Creates new mine safety credit, revises the credit for mine rescue
team training and allows these credits against the AMT.
_________________________________________________________________
Bill
H.R. 3590
Sept. 19, 2007
Sponsor
Rep. Nick Lampson
Effect on AMT
Extends the AMT tax relief provisions through 2007.
_________________________________________________________________
Bill
S.Con.Res. 21
May 17, 2007
Sponsor
n/a
Effect on AMT
House and Senate adopted the FY2008 budget resolution.
The resolution calls for a one-year patch for the AMT.
_________________________________________________________________
Administration's Proposals
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.
FOOTNOTES
1 There is also a corporate minimum tax, but it is not addressed in this report.
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 CRS Report RS22083, Alternative Minimum Taxpayers By State: 2003, 2004, and Projections for 2007, by Gregg Esenwein.
END OF FOOTNOTES
- AuthorsEsenwein, Gregg A.Maguire, Steven
- Institutional AuthorsCongressional Research Service
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2007-22389
- Tax Analysts Electronic Citation2007 TNT 194-52