Tax Reform: The Alternative Minimum Tax

Tax Reform: The Alternative Minimum Tax

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Updated December 4, 2017
Tax Reform: The Alternative Minimum Tax
The U.S. federal income tax has both a personal and a
Individual AMT
corporate alternative minimum tax (AMT). Both the
The modern individual AMT originated with the Revenue
corporate and individual AMTs operate alongside the
Act of 1978 (P.L. 95-600) and operated in tandem with an
regular income tax. They require taxpayers to calculate
existing add-on minimum tax prior to its repeal in 1982.
their liability twice—once under the rules for the regular
Table 2 details selected key individual AMT parameters.
income tax and once under the AMT rules—and then pay
the higher amount. Minimum taxes increase tax payments
Table 2. Selected Individual AMT Parameters, 2017
from taxpayers who, under the rules of the regular tax
system, pay too little tax relative to a standard measure of
Single/
Married
their income.
Head of
Filing
Married Filing

Household
Jointly
Separately
Corporate AMT
Exemption
$54,300
$84,500
$42,250
The corporate AMT originated with the Tax Reform Act of
1986 (P.L. 99-514), which eliminated an “add-on”
28% bracket
187,800
187,800
93,900
minimum tax imposed on corporations previously. The
threshold
corporate AMT is a flat 20% tax imposed on a
Source: Internal Revenue Code.
corporation’s alternative minimum taxable income less an
exemption amount. A corporation’s alternative minimum
The individual AMT tax base is broader than the regular
taxable income is the corporation’s taxable income
income tax base and starts with regular taxable income and
determined with certain adjustments (primarily related to
adds back various deductions, including personal
depreciation) and increased by the disallowance of a
exemptions and the deduction for state and local taxes. In
number of preference items, primarily related to extraction
addition, the individual AMT restricts the use of selected
activities (depletion and expensing of intangible drilling
tax preferences, such as tax-exempt interest from qualified
costs) and the special deduction for Blue Cross and Blue
private activity bonds and accelerated depreciation.
Shield companies. In 2013, the most recent year available,
Taxpayers deduct the AMT exemption amount to determine
the adjustments reduced AMT taxable income relative to
their AMT taxable income. To this measure of income
regular taxable income, while the preference items resulted
taxpayers apply a two-tier rate structure with rates of 26%
in greater AMT taxable income. A corporation must pay the
and 28% to determine their personal AMT liability; they
AMT if the computation of tax under the AMT is greater
pay the higher of their regular or AMT liability.
than the computation of its tax under the regular tax. The
corporate AMT serves to limit the use of tax preferences to
Individual AMT Revenue
reduce tax on retained, as well as distributed, earnings. The
As shown in Table 3 the individual AMT revenues were
corporate AMT allows a credit for prior year corporate
between 1.5% and 2% of individual tax receipts in 2004
AMT payments and also exempts small business
and 2014. In those years, tax filers paying the individual
corporations (with gross receipts averaging less than $7.5
AMT were 2.3% (in 2004) and 2.9% (in 2014) of all tax
million per year) entirely.
filers.
Corporate AMT Revenue
Table 3. Selected Individual Income Tax Statistics
As shown in Table 1, the corporate AMT revenues were
roughly 1% of corporate tax receipts in both 2003 and

2004
2014
2013. In these years, firms paying the corporate AMT were
less than 2% of all corporations.
Number of Returns
132,226,042
148,606,578
Number of AMT
3,096,299
4,277,624
Table 1. Selected Corporate Income Tax Statistics
Returns

2003
2013
Total Tax Liability
$884,342,703
$1,432,797,923
Before Credits
Number of Returns
5,401,237
5,887,804
AMT Liability
$13,029,239
$28,645,905
Number of AMT Returns
9,564
10,222
Source: Department of the Treasury, Internal Revenue Service,
Total Tax Liability (‘000s)
$241,275,165
$437,372,463
Individual Income Tax Complete Book, 2004 and 2014, Table 1.4.
AMT Liability (‘000s)
$2,298,776
$4,197,924
Due to its design, a taxpayer is more likely to face the
Source: Department of the Treasury, Internal Revenue Service,
individual AMT if they reside in a “high tax” state or if they
Corporation Complete Book, 2003 and 2013, Table 2 and Table 23.
have children. Also, since the graduated regular income tax
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Tax Reform: The Alternative Minimum Tax
rates extend higher than the top AMT tax rate, nearly 60%
Given that the corporate and individual AMTs both
of taxpayers with incomes between $200,000 and $1
disallow selected tax preferences (removing their ability to
million face the individual AMT, making this group of
influence choices), they could improve the economic
taxpayers more than three times as likely to pay the
efficiency of the federal tax system. However, affected
individual AMT as taxpayers with income greater than $1
corporations and individuals face higher marginal tax rates
million.
as a result of the AMT, which is likely to influence
economic decisions. Overall, it is not clear which effect is
Economic Analysis of the AMTs
larger. The overall effect depends upon taxpayers’
Ideally, the regular tax system would fully address the
awareness of how the AMT applies to them, taxpayers’
trade-offs between equity, efficiency, and simplicity, along
responsiveness to these incentives, and other factors.
with the need to raise revenue. However, the existence of
the AMT—a parallel tax system—suggests that the regular
Simplicity and Transparency
tax system does not achieve the desired balance under all
The AMT reduces both the simplicity and transparency of
circumstances.
the tax system. The need to calculate taxes twice for many
corporate and individual taxpayers decreases the simplicity
Equity
of the overall tax system. The AMT is also likely to reduce
The AMT was originally motivated by a rough idea of
the transparency of the federal tax system, as corporations
vertical equity: high-income taxpayers and profitable
and individuals may have greater difficulty in determining
corporations should be required to pay at least some income
the tax consequences of certain choices.
taxes each year. The AMT attempts to achieve this by
denying selected tax benefits to certain taxpayers, which
Recent Proposals
may improve the overall equity of the tax system.
The House-passed version of the “Tax Cuts and Jobs Act”
would eliminate both the corporate and individual AMT
The design of the corporate and individual AMTs may raise
beginning in 2018. The Senate-passed version, however,
concerns about horizontal equity, which requires that
would retain the corporate AMT and modify the individual
taxpayers with similar abilities to pay should pay similar
AMT (by raising the AMT exemption levels). The
taxes. The regular tax system, arguably, addresses this
modification of the individual AMT would sunset at the end
concern by allowing taxpayers with certain characteristics
of 2025.
to pay less in taxes than otherwise equivalent taxpayers.
The AMTs retain some of these preferences and disallow
The House “Better Way” tax reform blueprint proposed to
others. In cases where the AMT treatment differs from the
eliminate both the corporate and individual AMTs. The
regular income tax, ability-to-pay arguments may not be
Urban-Brookings Tax Policy Center (TPC) estimated that
taken into account and horizontal equity may be reduced as
repealing the individual AMT would reduce federal revenue
a result. This may reduce the overall equity of the tax
by $427.3 billion over 10 years. The TPC did not separately
system.
estimate the revenue effects of repealing the corporate
AMT.
Efficiency
A tax system is considered economically efficient if it does
This In Focus is part of a series of short CRS products on
not distort the choices that would be made in its absence.
tax reform. For more information, congressional clients
No feasible tax system is fully efficient. This is because the
may visit the “Taxes, Budget, & the Economy” Issue Area
structural components of a feasible tax system—such as tax
Page at www.crs.gov.
rates, deductions, and credits—influence decisions that
taxpayers make.
Donald J. Marples, Specialist in Public Finance
IF10705

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Tax Reform: The Alternative Minimum Tax

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