Alternative Minimum Tax

This report is a nontechnical primer on the alternative minimum tax (AMT) for individuals, which is extended to help ensure that high-income individuals do not avoid significant tax liability. AMT is a separate tax system that parallels the regular individual income tax system. The Department of the Treasury estimated that about 17 million taxpayers would pay additional taxes under AMT by 2010. A minimum tax was first enacted in 1969 after the Secretary of the Treasury report that 155 high-income individuals paid no federal income tax in 1966. AMT is expected to affect about 1.3 million taxpayers---about 1.3 percent of all taxable returns---and generate a projected $5.8 billion in additional tax liability in 2000. AMT is not indexed to account for inflation and the legislation that excludes personal tax credits from AMT rules will expire in 2001. AMT features are expected to have increasing budgetary significance in future years. It is projected to shift from affecting mostly higher-income individuals to more middle-income taxpayers between 2000 and 2010 and may also affect some economic incentives created by the regular tax system.

GAO noted that: (1) AMT was created to reduce the ability of individuals to escape payment of tax on income by using tax preferences available under the regular tax system; (2) a type of minimum tax was first enacted in 1969, following congressional testimony by the Secretary of the Treasury reporting that 155 high-income individuals paid no federal income tax in 1966; (3) over the intervening years, the minimum tax has been amended a number of times, producing today's AMT; (4) the legislative history for AMT indicates that as Congress amended the law, the overriding objective remained constant; (5) AMT can affect taxpayers' tax liability in two ways: (a) directly, by imposing an AMT liability that exceeds their regular tax liability; or (b) indirectly, by reducing the amount of certain tax credits allowable under the regular income tax; (6) to date, recent research at the Joint Committee on Taxation (JCT) and the Department of the Treasury has indicated that AMT has affected relatively few, mostly higher income, taxpayers and has generated a relatively small amount of tax liability in addition to the regular income tax; (7) according to the research at JCT and Treasury, however, the number of taxpayers affected by AMT and the corresponding tax liability generated are expected to increase substantially over the next 10 years; (8) the projected increases in AMT coverage and additional tax liability are primarily attributable to the following: (a) unlike the regular tax system, the AMT system is not indexed to account for inflation; and (b) the legislation that excludes personal tax credits from AMT rules will expire in 2001; (9) according to research at Treasury, the annual effects of these two AMT features are expected to have increasing budgetary significance in future years; (10) in 2010, AMT's lack of inflation adjustments and limitation of personal credits are estimated to account for about $24 billion and about $7 billion in additional tax revenues, respectively; (11) the projected increase in AMT coverage and the complexity of the system would significantly add to the overall compliance burden on taxpayers and the administrative burden on the Internal Revenue Service; and (12) AMT's projected increase would also affect the distribution of taxes among individuals.