Myth 1: The Alternative Minimum Tax targets millionaires.
Fact 1: While the Alternative Minimum Tax was originally created to target millionaires, today it falls most heavily on non-millionaires.
The Alternative Minimum Tax (AMT) was created in 1969 to prevent 155 wealthy taxpayers from using deductions and credits to avoid paying any federal income taxes.
Here’s how it works. Taxpayers who are subject to the AMT must calculate their tax liability twice, once under regular income tax rules and again under AMT rules. If liability under the AMT proves higher, taxpayers pay the difference as an add-on to the regular tax. The difference paid is their AMT.
However, mainly due to the failure to index the AMT for inflation in 1981 when the regular income tax was indexed, the reach of the AMT has expanded over time to hit middle-income people it was never intended to tax. As a result, the AMT impacts a growing share of the population. According to the Congressional Budget Office, last tax season 4.5 million taxpayers were affected by the alternative minimum tax, an increase of over 4 million taxpayers since 1970.
Until 2000, less than 1 percent of taxpayers paid the AMT in any given year; by 2008, 3 percent of taxpayers were subject to the AMT. And its costs go far beyond increased tax liabilities.
This chart shows the composition of taxpayers affected by the Alternative Minimum Tax in 2009 by adjusted gross income (AGI), using data from the 2010 CBO Brief, “The Individual Alternative Minimum Tax.”
As you can see, the AMT hits far more than the highest-income individuals. In fact, only 10 percent of AMT revenue came from taxpayers making above $500,000 and only a fraction of those people are millionaires.
Also, the majority of AMT revenue came from taxpayers in the $200,000-$500,000 (in 2009 dollars) income range while some 5 percent of revenue came from taxpayers making less than $100,000.
As we see, 23 percent of AMT revenue came from taxpayers with income between $100,000 and $200,000.
This evidence stands in sharp contradiction with the original purpose of the AMT, which was to prevent 155 millionaires from using deductions and credits to avoid paying any federal income tax.
Myth 2: The AMT is family friendly.