Forgotten Tax Policy: The AMT

As we near the end of the calendar year, a familiar drone has been absent this year in discussions about tax policy - the dreaded Alternative Minimum Tax (AMT). Despite early action this year that has put the issue off until 2010, the problems with the AMT that make it such a pain still exist.

The Urban-Brookings Tax Policy Center (TPC) released a short briefing paper [1] in which Katherine Lim and Jeffrey Rohaly updated the TPC's good work on projecting the impact of the AMT. Although Congress enacted another AMT patch along with the Recovery Act back in January this year, that legislation did not fix the problem with the AMT. The two biggest issues - lack of indexing for AMT brackets and exemptions and exacerbation of the AMT by the Bush tax cuts - still exist. Those two issues present a very big potential problem for Congress and, in fact, for millions of Americans. From the introduction:

Absent another temporary fix or other change in law, the tax cuts and lack of indexation will combine to push more than 27 million taxpayers onto the AMT in 2010. If Congress extends the Bush tax cuts, that number would swell to almost 52 million by 2020. Alternatively, if Congress allows all of the tax cuts to expire—which is highly unlikely—the number of AMT taxpayers would fall dramatically in 2011, but then trend back upward over time to hit more than 37 million taxpayers by 2020. Regardless of how Congress deals with the coming expiration of the Bush tax cuts, policymakers will also need to address the explosive growth of the AMT from an obscure tax affecting only 20,000 filers in 1970 to one that could affect nearly a third of all taxpayers in 2010. (emphasis added)

The TPC paper is a great introduction to the AMT for those looking to understand it better, including background about the tax, historical impact and rates, revenue impact, and information about typical AMT filers among other topics. It's worth a read. (h/t: Bruce Bartlett/CG&G [2])

TPC: The Individual Alternative Minimum Tax: Historical Data and Projections [1]

Image by Flickr user Casey Serin [3] used under a Creative Commons license.