The Alternative Minimum Tax For Individuals PDF Download

Over time, the individual income tax has been used as a vehicle to promote various social and economic goals. This has been accomplished by according preferential tax treatment to certain items of income and expense. The net result, however, has been that by taking advantage of the preferences and incentives in the tax code, some individuals can substantially reduce their income taxes. To make sure that everyone paid at least a minimum of taxes and still preserve the economic and social incentives in the tax code, Congress, in 1969, enacted the predecessor to the current individual alternative minimum tax (AMT). It is calculated in the following manner. First, an individual adds back various tax preference items to his taxable income under his regular income tax. This grossed up amount then becomes his tax base for the AMT. Next, the amount of the basic exemption is calculated and subtracted from the AMT tax base. A two-tiered tax rate structure of 26% and 28% is then assessed against the remaining AMT tax base to determine AMT tax liability. The taxpayer then pays whichever is greater, his regular income tax liability or his AMT tax liability. Finally, the AMT tax credit is calculated as an item to be carried forward to offset regular income tax liabilities in future years. Since its inception, the value and effectiveness of the minimum tax has often been the subject of congressional debate. Recently, the combined effects of inflation and the legislative reductions in the regular income tax, enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), and the Working Families Tax Relief Act of 2004 (WFTRA), have increased congressional concern about the expanding impact of the alternative minimum tax. It is now estimated that, if the reductions in the regular income tax are made permanent, then the number of taxpayers subject to the AMT will increase from about 1.8 million in 2001 to over 41 million by 2013. Fixing the problem will be expensive. It is estimated that repealing the AMT would cost, depending on whether EGTRRA/JGTRRA/WFTRA provisions are extended beyond 2010, $718 billion to over $1 trillion between fiscal years 2006 and 2016. Indeed, some projections suggest that by 2008 it would be less costly to repeal the regular income tax than to repeal the AMT. Both EGTRRA and JGTRRA provided for temporary (expiring after 2004) increases in the basic exemption for the AMT as a means of mitigating the interaction between the reductions in the regular income tax and the AMT. JGTRRA increased the AMT exemption to $58,000 for married taxpayers and $40,250 for unmarried taxpayers. WFTRA extended these increases in the AMT exemption through 2005. In May 2006, Congress passed the Tax Increase Prevention and Reconciliation Act of 2005 which increased, through 2006, the AMT exemption to $62,550 for joint returns and $42,500 for unmarried taxpayers. This report will be updated as legislative action warrants.