	An Overview of the AMT

The AMT provides for an alternative tax calculation on a broader tax base than theregular tax. Exemptions are phased out. Theindividual compares AMT liability and regular tax liability and pays the higher one. Another 6 million returns would have been subject to limits on tax credits, such as the child credit and education credits enacted in 1997;this surge in the AMT coverage would have occurred in large part in 2002, but H.R. 1836 made the most important credit (the child credit) permanently availaleunder the AMT. As this table illustrates, the shift of exposure to the AMT from the very highest income classes to the middle and upper middle income classes is dramatic over time even withoutthe tax cuts in H.R. 1836 . And any tax cut thatreduces regular tax liabilities and does not also alter the AMT will interact with the AMT intwo ways: it will increase the number of taxpayers on the AMT and the number affected bythe credit limit, and it will cause some or all of the tax cut not to be received by certainfamilies. Married couples also tend to havehigher incomes and, while their AMT exemptions are also higher, may be more likely to beaffected by the AMT. H. R. 1836, which included the provisions in H.R. Because the estimates are calculated with asignificant rate reduction, the cost will be smaller, reaching about $3.1 billion for the standarddeduction and $4.7 billion for the increase in the 15% bracket. A large part of this effect is that more individuals will be pushed into the Alternative Minimum Tax because of the rate reductions and these individuals will not benefit from themarriage penalty relief. Moreover, for taxpayers subject tocredit limits, a change in the regular tax would have been offset by a loss in the credit, so thetaxpayer would not have benefitted from the tax revision. And, the tax cuts in the marriagepenalty legislation were likely to substantially increase the number of taxpayers on the AMT,a number that, as noted earlier, is already growing rapidly. 6 over the next ten years are taken back by the AMT,making the net budget effect $67 billion smaller. 3 , anacross-the-board tax cut proposal in the 106th Congress. The final proposal adopted by both houses, H.R. Indexing the exemptions is the step that would be necessary to begin to keep theAMT more or less fixed in relative importance in the tax system, assuming that no otherchanges in the regular tax structure occurred. The AMT as the Tax of the Future

Some might see the AMT as a desirable, relatively-flat alternative tax with a wider base, and consider the expansion of the AMT desirable. (9) The exemption levelsin the AMT are not adjusted for family size or for head of household status; there are marriagepenalties within the AMT structure, and tax preferences are not uniformly included orexcluded. How the AMT should be altered as regular tax changes are made is also unclear. It wouldbe appropriate to simultaneously adjust the AMT deductions, brackets and rates to conformto the rate changes. Also, under this view of the AMT there appears no clear reason to allow credits under the AMT although there is a reason to adjust the AMT for the expansion of the standarddeduction in the marriage penalty legislation. Conclusion

The growth in the AMT has been considered a potential problem for some time, and itsimportance increases with tax cuts, such as those passed in 1997 and 2001.
Tax cuts have been addressed recently. Rate reductions and across the board tax cuts were part of the H.R. 1836 , the tax cut signed by the President on June 7. Thisbill includes the changes in standard deductions and rate brackets relating to the marriagepenalty and also included in H.R. 6 , passed earlier by the House.
The Alternative Minimum Tax (AMT) provides for an alternative tax calculation, on a broader base but with a large exemption and a two-tier rate that is below the top tax rates inthe regular tax structure. It is paid when the tax liability figured using the AMT base and ratesis higher than regular tax liability. The AMT is expected to grow rapidly and extend furtherinto the middle class because the exemptions in the AMT are not indexed for inflation. Inaddition, the tax credits (such as the child credit) enacted in 1997 would have caused manymiddle class taxpayers to be affected by the AMT. A temporary provision allowing thesecredits to be taken against the AMT was adopted last year, and was made permanent for thechild credit by H.R. 1836 .
The marriage penalty legislation, and other proposals for cutting taxes will be limited in their effects for some individuals unless changes are also made in the alternative minimumtax (AMT). Individuals who pay the AMT are not affected by cuts in the regular tax andindividuals who switch to the AMT will not receive the full tax cut. This constraint will growover time. For example, about 28 % of the tax cuts over the next ten years, in a bill similarto H.R. 6 considered in the 106th Congress would not have been received bytaxpayers because of the AMT. This effect grows over time; by 2008, 44% of the tax cut willnot have been received.
Cuts in regular tax, without also addressing the AMT, would cause more and more taxpayers to the subject to the complexities of the AMT, and also increase the revenue costsof future measures to restrain the growth of the AMT. H.R. 1836 partiallyaddressed this issue, by making the child credit apply against the AMT. The bill alsoincreased the exemptions by $2,000 for singles and $4,000 for joint returns, but theseprovisions sunset in 2004.
There are a number of different policy options that might be considered in evaluating the AMT and its interaction with the regular tax. For some, a priority has been in making theexclusion for credits permanent, while for others indexing may be the most important priority. Both of these approaches will be costly in the future (about $26 billion for the credit ten yearsfrom now and about $14 billion for indexing). Others might wish to eventually phase out theAMT, which will raise about $37 billion by 2010. One can also make a case for expandingthe coverage of the AMT as an eventual flat tax, although in some ways the AMT does notconform to certain design principles (such as adjusting exemptions for family size). Anotherissue is how to adjust the AMT as changes in the regular tax system are made, to keep therelative position and original purpose of the AMT intact. In the latter case, the AMT mightbe adjusted when fundamental changes are made in the regular tax (rates, bracket widths,standard deductions) but not for proposals that provide special subsidies. This report will beupdated to reflect legislative developments.