CRS Updates State-by-State Breakdown of AMT

Temporary increases in the AMT exemptions expired at the end of 2006. If legislative changes do not extend the expired changes, then the number of taxpayers subject to the AMT will rise from around 4.1 million in 2006 to 22.2 million in 2007. Further, by 2010, some 29 million taxpayers will be subject to the AMT.² Taxpayers with incomes in the $100,000 to $500,000 income range will be the hardest hit: 88% of these taxpayers will be subject to the AMT in 2010.

Itemized deductions for state/local taxes (62.7%), personal exemptions (22.4%), and miscellaneous itemized deductions (11.4%) together account for 96% of the preference items that are subject to tax under the AMT but not subject to tax under the regular income tax.³ 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 2004 and 2005, respectively, the percentage of taxpayers in each state that were subject to the AMT. Of all the states, South Dakota, Mississippi, Tennessee, Alaska, and Alabama had the smallest percentage of taxpayers subject to the AMT. In these five states, 1% of taxpayers were on the AMT in 2005. 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.⁴

On the other hand, New Jersey, New York, Connecticut, the District of Columbia, and Maryland were the states with the largest percentage of taxpayers subject to the AMT. For instance, in New Jersey, about 56 out of every 1,000 taxpayers fell under the AMT in 2004. By 2005, about 68 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 potentially expanding impact of the AMT has 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, P.L. 109-222). 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.

Because the temporary patches to the AMT expired at the end of 2006, in 2007 almost 18 million more taxpayers will be subject to the AMT than was the case in 2005.⁵ 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 2005, 25,415 taxpayers in Tennessee were subject to the AMT. Thus, Tennessee taxpayers accounted for only 0.62% of the total AMT returns filed in the United States that year. However, if that percentage remains constant, and the temporary patches to the AMT expire, then by 2007 up to 138,609 (0.62% times 22.184 million) 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. Two estimates are provided in Table 3. The CRS 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 2005. In contrast, the Citizens for Tax Justice (CTJ) use a microsimulation model to predict how many taxpayers in each state would be subject to the AMT.⁶ Both methodologies make assumptions that could be challenged, but both still provide reasonable estimates of the potential impact of the AMT in 2007 absent legislative changes.

 Table 1. Number of Alternative Minimum Taxpayers by State Tax Year

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

³ JCT, June 25, 2007, p. 18.

⁴ 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.

⁵ JCT, June 25, 2007.

⁶ Citizens for Tax Justice, "Who Pays the Individual AMT: State-by-State Estimates for 2006," March 22, 2006.