A recently released Congressional Research Service (CRS) Report entitled “The Alternative Minimum Tax for Individuals” examines the effects of the Alternative Minimum Tax (AMT) without yet another Congressional fix.
The AMT is another way of computing an individual’s income tax with limited deductions and the elimination of certain tax preferences. Taxpayers pay the higher of the regular computed tax and the AMT.
When calculating the AMT, taxpayers are allowed to deduct a specified amount that is not taxable; this is called the AMT exemption. This exemption is not automatically inflation-adjusted, like most other tax deductions, but Congress has been adjusting it annually. For example, the permanent exemption amounts are $33,750 for unmarried taxpayers and $45,000 for joint filers. Congress has temporarily increased these amounts over the years, and for 2011, the exemption amounts were $48,450 for unmarried taxpayers and $74,450 for joint filers. Without Congressional action, these AMT exemption amounts will revert to the permanent amounts in 2012.
Another temporary adjustment to the AMT allows a number of personal credits to be deducted from the AMT. The credits affected include child and dependent care credit, elderly and disabled credit, mortgage credit, and the Hope and Lifetime education credits. These will no longer offset the AMT after 2011 unless Congress acts.
The CRS Report notes that without Congressional action, an estimated 30 million taxpayers (approximately 20% of all taxpayers) will be hit by the AMT in 2012. Compare this to the roughly 600,000 taxpayers (approximately 1% of all 1997 taxpayers) who were subject to the AMT in 1997.
A permanent fix to the AMT without adjustments to the regular tax could be expensive. For example, the CRS Report notes that if the AMT is repealed, the lost revenue would be over $1.3 trillion between 2011 and 2022 if the Bush era tax cuts are not extended and over $2.7 trillion if they are extended.
It is difficult to say what the Congressional Tax Reform committee (also referred to as the “super committee”) will come up with in November. But one thing is for sure: some taxpayers will have to pay more to fix the deficit problem.