The Facts about the Alternative Minimum Tax

Separating economic myths from economic realities

Editor's Note: Reason columnist and Mercatus Center economist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.

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.

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  • Joe M||

    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 taxpayers making less than $100,000 were liable for the AMT as well.

    As we see, 23 percent of taxpayers with income between $100,000 and $200,000 have AMT liability.

    This is incorrect and/or poorly worded. 5% of revenues came from taxpayers making less than $100,000, and 23% of revenues came from taxpayers with income between $100,000 and $200,000.

    That really needs to be fixed. The first part of the first sentence is accurate, but then it's a mess.

  • some guy||

    I saw that too, Joe. Sloppy wording in the article, if we assume the pie chart is accurate. In reality that 5% of revenue from the

  • ||

    Thanks guys. It has been fixed and hopefully makes sense now.

  • Joe M||

    The system works!

  • ||

    too bad the gub'mint don't...

  • Joe M||

    Actually, I would be curious to find out what percentage of people in each of those tax brackets has to pay the AMT.

  • ||

    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.

    I don't think I've ever heard that one. A law aimed at 155 people? Sounds like a Bill of Attainer to me. Anyone know if it was ever legally challenged as such?

  • Barely Suppressed Rage||

    What the fuck is with the damn spam filter? I'm trying to respond to SugarFree, you stupid fucking squirrels!

  • Barely Suppressed Rage||

    Oh sure - THAT they let through.

  • ||

  • Barely Suppressed Rage||

    Bill of Attainder.

    I'm trying to figure out what the hell the damn "third party spam" filter is finding objectionable about what I'm trying to post.

  • Barely Suppressed Rage||

    A tax that has general applicability is not a bill of attainder just because the legislature knew, or even intended, that it would apply to only 155 people. It's written such that it applies to ANYone who meets the applicability thresholds. Just because we know there are only 155 people who happen to meet that threshold right now doesn't make it a bill of attainder.

  • ||

    OK, fair enough.

  • Barely Suppressed Rage||

    A bill of attainder is a law declaring someone guilty of a crime and punishing them without due process.

  • Almanian||

    GUILTY! Bailiff, cut off his tweeter.

  • d||

    The Declaration of Independence was a bill of attainder; soon outlawed by the new constitution.

  • DRM||

    Yeah, see, Fact 3 is why I don't give a damn.

    When the professional classes of California, Massachusetts, New Jersey, and New York start voting for lower government spending and donating to candidates who call for it to go down, then I'll care about the taxes that especially hurt them. In the meantime, the correct policy is one that increases their share of the burden of paying for the spending they want. They keep voting blue, the country should increase the AMT rate.

  • Professional Critic||

    Horseshit populism. The fact is that 99% of the voters of these states don't pay AMT, so don't care that they're fellow state citizens get screwed. Why pin the blame on those who happen to live in those states?

  • Joshua||

    Alternately, - the fed should stop allowing deductibility of state taxes. Low tax states end up effectively subsidizing high tax states.

  • ||

    Agreeable, but many low-tax states receive more from Washington then paid.

  • DLM||

    I'm waiting for the alternative AMT, which will be designed to tax people who don't pay enough taxes under the current AMT and will dynamically change based on the position of the Sun.

  • Joe M||

    Kinda like an ATM machine?

  • ||

    I'm not sure I agree with Fact 2. The reason you might be subject to AMT if you have a passel o' rugrats is because you're getting lots of juicy exemptions for them. Unless you agree that people with kids should be rewarded with lower taxes, calculating AMT to make up for some of that difference acutally makes sense.

    I say that as someone who hates the AMT with a burning passion, but is also not thrilled that I am subsidizing other people's brats.

  • Joe M||

    My most recent tax refund was a couple thousand, and 3/4 of that came from having a baby in 2010. Thanks!

  • ||

    You got the full $1000 child tax credit, I presume?

    Fucking kids. If they're not squalling in restaurants, they're messing up the tax code.

    Congrats on the new addition, btw. :-)

  • Joe M||

    I'm telling you, these things are goldmines.

  • T||

    Okay, there's that language that pisses me off again. You're not subsidizing other people's kids. His effective tax rate has nothing to do with yours. Unless someone gets a check from the federal government and pays no taxes, they aren't getting a subsidy. Quit saying you subsidize someone else because they have a lower effective tax rate. It's simply not true.

  • ||

    Well, there's the argument that if certain lifestyle choices didn't come with tax advantages, the rates might be lower overall.

    And, I'm all for people getting as much of their own money back as possible, but as you note, depending on your income level, some of these credits are refundable. You don't have to be super poor to be a net tax receiver.

  • ||

    Well said, middle-class deductions take a big hit to the budget, why should a homeowner living in a small townhouse in the northeast subsidize somebody's million dollar mortgage house in texas which is the limit or having multiple kids because mom does not work in utah, it cuts both ways, the tax code should not be a vehicle, if it is it should be narrowly tailored and defined and simpler and more broad. Stock options also count so be careful.

  • ||

    Don't think they should be rewarded, but I think a filer should be able to exempt the true cost (not just some measly $10K exemption or whatever it is) of rearing a kid from their top-line income. And filers should be able to take a bunch of other essential cost-of-living items right off the top line: cost of housing, groceries, medical insurance, paying for somebody else's housing, groceries, medical insurance, etc.

  • ||

    Why? Just playing devil's advocate here, but I don't think it's a foregone conclusion that the decision to have a child is any more worthy of tax breaks than the decision to have a pet, or take a vacation.

  • ||

    How about having a kid to get on welfare.

  • ||

    agree, but remember you and I both were subsidized brats at one time

  • ||

    Well, that settles it. Better keep that pyramid scheme going into eternity, then, because we were involuntary beneficiaries of the system as tots.

  • Professional Critic||

    Also, Myth #1 is probably a fact. "Millionaire" typically refers to a person's total net worth, not their annual income. I would imagine that someone who has had a few years earning >200K is a millionaire by the normal definition.

    Not that it matters, it's a horrible rule, but accuracy should count for something, even in discussing the tax code.

  • ||

    It's also quite common for a high income earner to have a low and even negative net worth.

  • ||

    According to "The Millionaire Next Door", you're right.

  • I.R.S.||

    The Alternative Minimum Tax, because filing your tax return wasn't complicated enough!

  • BRM||

    We should scrap the tax code as it is, and roll all federal income-based taxes into one federal tax. It should be a fixed percentage of income (say 20%) and it should start at about $30K, below which you don't pay anything, and above which you pay 20% of what ever you earn over $30K.

    Makes the tax system simpler and makes the burden spread out in a more inclusive manner, sparing the working poor and the random teenager who can actually find a job.

    And it leaves your lifestyle choices (big house, big family, big donations, etc) to you and you alone to pay for.

  • Asmodai||

    It should be a fixed percentage of income (say 0%)

    FTFY

  • ||

    I like it. What about capital gains? Same rate? Why should income earned by investments be taxed differently than income earned by labor/employment?

  • ||

    Also, Myth #1 is probably a fact. "Millionaire" typically refers to a person's total net worth, not their annual income.

    Actually, I think it originally referred to annual income, and came to refer to net worth at some point.

  • ||

    That definition actually seems more apt these days. Having a million or three in net worth doesn't mean much now.

  • ||

    hmmm, think about it. there was an Indian that owned the land that was to become Kansas City. it was when he sold that property that he became known as the "Millionaire Indian". he had a million dollars from that sale but, it wasn't his income year after year...

  • ||

    AMT sucks. Been out of work for 14 months. Wife and I divorcing, but did not complete in 2010, so had to file "Married Filing Separately." So I'd have money to live on in 2010, had to take out 401k funds as they were rolled to an IRA. Caused me to be whacked by AMT. AMT should be abolished.

  • ||

    Whenever someone mentions scraping the tax code, I remind them that the tax code is not about generating revenue. It is about control, social engineering and rewarding friends and punishing enemies. It will never be changed for that reason. If it were about generating revenue it would be changed.

  • Stephen||

    Tax the Rich! Tax the Rich!
    The fat sheep flee the herder!
    Call your Senator! —sire or bitch—
    They’re getting away with murder!

    Letter the Editor! show your spleen!
    Let’s stop this vile unfairness!
    Boost their percentage to heights unseen,
    (Be damned to fiscal awareness!)

    Tax the Rich! Tax the Rich!
    Demand a committee hearing!
    With your percentage a chronic itch,
    The fat sheep need more shearing!

    For 92 years it is safe and sound,
    Well known to Pol and staffer;
    That “revenue lost” is patronage found
    (Be damned to Arthur Laffer)

    Tax the Rich! in your envy lies
    The key to this populist racket.
    While productivity brings; “surprise!
    You’ve moved to a higher bracket!”

    Be a careful chump in demanding who
    And where a levy exacts,
    Soon little old you will be subject to
    The Alternative Minimum Tax.

  • ||

    Note that there's some words missing in the title of the second chart.

    "Almost [half of all?] AMT Revenues Come From 4 Blue States"

  • Dan||

    Congress makes a fucking mess of the tax code by 1960 so it makes more of a mess using the great linear-er AMT no matter if you live in NYC or Hayward WI. The code will bring this nation down, mark my words. There is no way out now! J.M. RIP

  • ||

    The Alternative Minimum Tax was meant to prevent people from avoiding income tax by investing in mortgaged real estate, municipal bonds, and a gaggle of loop holes. It was not meant specifically to tax the rich. If you get rid of AMT then you invite people to get mortgages they cannot afford.

  • nike air force 1||

    is good

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