Order Code RS22200
July 19, 2005
CRS Report for Congress
Received through the CRS Web
The Potential Distributional Effects of the
Alternative Minimum Tax
Gregg Esenwein
Specialist in Public Finance
Government and Finance Division
Summary
The alternative minimum tax for individuals (AMT) was originally enacted to
ensure that high-income taxpayers paid a fair share of the federal income tax. However,
the lack of indexation of the AMT coupled with the recent reductions in regular income
taxes has greatly expanded the potential impact of this tax.
Temporary increases in the AMT exemption are scheduled to expire at the end of
2005. If this occurs, then certain taxpayers will be more adversely affected than others.
In general, married taxpayers filing joint returns will be more adversely affected than
single taxpayers. In addition, taxpayers with large families will be more adversely
affected than taxpayers with small families.
In terms of income, the largest increase in taxpayers subject to the AMT will occur
over adjusted gross income (AGI) ranges of $100,000 to $500,000. Taxpayers with
AGIs between $50,000 and $100,000 will eventually be affected, with the negative
effects of the AMT growing substantially over time. Taxpayers with AGIs above
$500,000 will not be significantly affected by the expiration of the higher AMT
exemption.
This report will be updated as legislative action warrants or as new data become
available.
Background
The alternative minimum tax (AMT) for individuals was originally enacted to ensure
that all taxpayers, especially high-income taxpayers, paid at least a minimum amount of
federal taxes. However, absent legislative action, there will be a significant increase in
the number of middle- to upper-middle-income taxpayers affected by the AMT in the near
future. In 2004, about 3 million taxpayers were subject to the AMT, but by 2006, up to
21 million taxpayers could be subject to the AMT.
Congressional Research Service ˜ The Library of Congress

---

CRS-2
There are two main reasons for the increase in the number of taxpayers affected by
the AMT. First, under the regular income tax, the tax brackets, standard deductions, and
personal exemptions are indexed for inflation. The AMT tax brackets and basic
exemptions are not indexed. Over time this has produced a reduction in the differences
between regular income tax liabilities and AMT liabilities at any given nominal income
level, differences that will continue to shrink in the absence of AMT indexation. The
second reason is that the 2001 and 2003 reductions in the regular income tax further
narrowed the differences between regular and AMT tax liabilities. The combination of
these two factors means that, absent legislative changes, there will be significant growth
in the number of taxpayers affected by the AMT.1
The effects of the AMT have been temporarily mitigated through an increase in the
basic exemption for the AMT. For 2005, the AMT exemption is $58,000 for joint returns
and $40,250 for unmarried taxpayers. In 2006, the basic AMT exemption is scheduled
to decrease to its prior law levels of $45,000 for joint returns and $35,750 for unmarried
taxpayers.
Who Will be Subject to the AMT in the Future?
If, in 2006, the basic exemption for the AMT reverts to its lower prior-law levels
then not only will there be a significant increase in the number of taxpayers subject to the
AMT, there will also be a significant change in the types of taxpayers who will be subject
to the AMT. The potential distributional effects of the AMT are summarized below.
! Married taxpayers filing joint returns will be more likely to fall under the
AMT than will taxpayers filing as singles or heads of households. This
occurs because, in 2001, taxpayers filing joint returns received more
generous reductions in their regular income tax liabilities than did
taxpayers filing as singles or heads of households. As a result, at any
given income level, taxpayers filing joint returns have seen their regular
income tax liabilities reduced to levels that are near or actually below
their AMT liabilities.
! Larger families will be more likely to fall under the AMT than will
smaller families. This occurs because personal exemptions, which are
allowed under the regular income tax, are not allowed under the AMT.
! Taxpayers who itemize their deductions under the regular income tax and
who have large itemized deductions for state/local taxes will be more
likely to fall under the AMT than will taxpayers who do not itemize their
deductions or taxpayers who take only small deductions for state/local
taxes. This occurs because deductions for state/local taxes are not
allowed under the AMT.2 Taxpayers in high-tax states who claim
1 For more detailed information on the AMT see CRS Report RL30149, The Alternative
Minimum Tax for Individuals, by Gregg Esenwein.
2 In addition to disallowing deductions for state/local taxes, the AMT does not allow
miscellaneous itemized deductions and allows deductions for medical expenses only to the extent
(continued...)

---

CRS-3
itemized deductions for state/local taxes will be more likely to fall under
the AMT than taxpayers in low-tax states who claim little or no
deductions for state/local taxes. Hence, taxpayers in high-tax states such
as New Jersey, New York, Connecticut, the District of Columbia, and
California will tend to be more adversely affected by the AMT than will
taxpayers in low-tax states such as Tennessee, South Dakota, Alaska,
Alabama, and Mississippi.3
! In 2006, even taxpayers who do not itemize their deductions on their
regular income tax returns will be subject to the AMT at relatively
modest income levels. For instance, taxpayers filing joint returns with
two children (four personal exemptions) will be subject to the AMT
when their incomes exceed $67,500. Taxpayers filing joint returns with
no children (two personal exemptions) will be subject to the AMT when
their incomes exceed $76,500.4
Table 1 shows the effects of the AMT by adjusted gross income (AGI) levels for
2005 through 2010.
! In 2005, taxpayers with AGIs in the $200,000 to $500,000 range are the
most affected by the AMT. Almost 67% of taxpayers in this income
range have AMT liabilities.
! In 2006 and beyond, taxpayers with AGIs in the $100,000 to $500,000
range will be the most affected by the AMT. By 2010, more than 95%
of the taxpayers with AGIs of $100,000 to $200,000 will be subject to the
AMT. Almost 86% of taxpayers with AGIs in the $200,000 to $500,000
range will be subject to the AMT.
! The number of taxpayers with AGIs in the $50,000 to $100,000 range
who will fall under the AMT will grow steadily over the 2006 to 2010
period. By 2010, over 66% of the taxpayers in this income range will be
subject to the AMT.
! The number of very high-income taxpayers (AGIs over $500,000) subject
to the AMT will remain relatively constant over the 2005 through 2010
period.
2 (...continued)
that they exceed 10% of AGI .
3 See CRS Report RL32942, State and Local Taxes and the Federal Alternative Minimum Tax,
by Steven Maguire, and CRS Report RS22083, Alternative Minimum Taxpayers by State, by
Gregg Esenwein.
4 For more information see CRS Report RS21817, The Alternative Minimum Tax (AMT): Income
Entry Points and “Take Back” Effects, by Gregg Esenwein.

---

CRS-4
To reiterate, it is the lack of indexation of the AMT combined with the reductions
in the regular income tax that are the primary factors responsible for producing these
results for taxpayers with AGIs between $50,000 and $500,000.
Table 1. Taxpayers With AMT Liability by Adjusted Gross Income in
2005 Dollars
Calendar Years 2005-2010
Adjusted Gross
Income
2005
2006
2007
2008
2009
2010
(000s)
Less than $50
0.0%
0.4%
0.8%
1.4%
2.2%
3.3%
$50 - $100
1.3%
34.6%
42.8%
50.5%
59.0%
65.9%
$100 - $200
16.7%
81.1%
86.2%
90.7%
93.0%
95.3%
$200 - $500
66.6%
86.9%
85.2%
86.5%
83.5%
85.7%
$500 - $1,000
27.5%
30.4%
28.4%
30.7%
28.4%
30.3%
Over $1,000
21.2%
23.4%
23.1%
24.9%
23.8%
25.5%
All taxpayers
2.1%
11.6%
13.2%
14.7%
16.3%
17.9%
Source: Congressional Budget Office.
Why Are Very High-Income Taxpayers Not So Adversely Affected
by the AMT?
Although the AMT was originally intended to make sure that high-income taxpayers
paid at least a minimum amount of federal income taxes, they will not be the group that
will be the most adversely affected by the AMT in the future. There are several reasons
why high-income taxpayers, especially those with adjusted gross incomes (AGIs) over
$500,000, will be less affected by the AMT than their lower-income counterparts.
First, for high-income taxpayers, the marginal tax rates they face under the regular
income tax tend to be higher than the marginal tax rates they face under the AMT. For
example under the regular income tax, the top two marginal income tax rates are 33% and
35%. The top rate under the AMT is 28%.
Second, under the regular income tax, personal exemptions are phased out for high-
income taxpayers. So the fact that personal exemptions are not allowed under the AMT
does not have a significant effect on high-income taxpayers who do not get personal
exemptions under the regular income tax.
Third, under the alternative minimum tax, the basic AMT exemption is phased out
for taxpayers filing joint returns when AMT taxable income exceeds $150,000. Hence,
many high-income taxpayers do not get a basic exemption under the AMT. Therefore,

---

CRS-5
the scheduled reduction in the basic AMT exemption will have no effect on their AMT
liabilities.
Finally, high-income taxpayers generally derive a significant percentage of their total
income from capital gains and dividend income. Under both the regular income tax and
the AMT, the tax rate on long-term capital gains and dividend income is limited to a
maximum rate of 15%.

---