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AMT, Alternative Minimum Tax, Taxation

From Loophole Buster to Middle Class Menace: The Rise of AMT

By Tax Project Team
Published: 02/12/2024

1969. A year of moon landings, Woodstock, Tie Dye, the Summer of Love, Vietnam War protests, and less glamorously, the birth of the Alternative Minimum Tax (AMT). What began as a narrow measure to prevent a handful of very wealthy individuals from exploiting tax loopholes has morphed into a complex beast, ensnaring millions of taxpayers, including the middle class.

 Born from Inequality

Imagine a world where billionaires could legally reduce their taxable income to zero – that is what sparked the AMT’s creation (Sound familiar?6). Congress, alarmed by reports of such tactics (In 1969!), devised this parallel tax system with stricter deductions and exemptions, aiming to ensure high earners paid their “fair share.”

 A Modest Beginning

Back then, the AMT targeted a tiny fraction of taxpayers – just 155 individuals in its first year1 making over $200,00 a year.4 It collected a mere $85 million, a drop in the ocean of federal revenue. Yet, it served its purpose, preventing blatant tax avoidance by the ultra-rich.

 The Unintended Creep

Fast forward to today. The AMT’s net has widened significantly, instead of the handful of extremely rich it is netting roughly 5 million taxpayers and is projected to catch 7 million by 2026 (See TCJA update). The culprit? Inflation and a lack of indexing. Unlike regular tax brackets, the AMT’s exemptions have not been adjusted for inflation, meaning increasingly middle-class Americans get swept up as their incomes rise with the cost of living. In 1969 when Congress passed AMT to today the Consumer Price Index from the Bureau of Labor and statistics based on annual inflation has risen a cumulative 900%. Which means a dollar in 1969 would be worth $9 today2.

The Price of “Fairness”

This unforeseen expansion creates a paradox. While the AMT still catches some high earners who game the system (or just follow what the law allows depending on your perspective), it now also burdens many individuals simply earning a decent living, and while well off, most do not consider themselves rich. For example, in contrast to those it was intended in 1969 making over $200K or over $1 million in current dollars, a family of 4 in San Francisco or New York making $250,000, while in the top 20th percentile of income, is by no means “rich” based on the cost of living in these areas and nowhere near the 1969 equivalent. This is especially true as many caught in AMT are wage earners that do not derive most of their income from investments, capital gains, or have businesses that have significant write offs. They face unexpected tax bills, negating deductions, and credits they otherwise may have relied on. This “invisible tax” can be financially devastating, pushing families into debt, and causing hardship for many in the middle class, and depriving them of wealth creation that can help them in their later years.

Overhead

While it did “catch” the very wealthy, it trapped what has become middle income (if upper middle) taxpayers in a much wider net. While roughly 5M million users are subject to AMT, 9.7M must calculate it even if they are not subjected to it.2 For these taxpayers they must calculate their taxes twice, once for their normal taxes and a second time for the AMT to determine the higher of the two. The Tax Foundation has estimated that this burden adds up to $4.6 billion on compliance overhead. 5

A Call for Reform

The unintended consequences of the AMT have ignited a debate. Critics argue it has become a regressive tax, disproportionately impacting the middle class for which it was never intended and undermining its original purpose of catching the very wealthy who were paying nothing. Some advocate for complete repeal, while others propose indexing adjustments and raising exemption levels. Members of both sides of the aisle including Bernie Sanders, and Ted Cruz have called for the complete elimination, while members like Hillary Clinton have proposed raising the limit significantly and adding a 2nd tier she refers to as the Buffet Rule for the Uber wealthy based on Warren Buffets calls for higher taxes on the very wealthy3. Many question the basic premise of AMT to begin with, the whole reason AMT exists is because of the maze of deductions in the Tax Code, especially available to business owners and higher net worth individuals. Congress enacted these for beneficial reasons, like economic incentives for growth or other areas the government wanted to incentivize. Having an alternate parallel tax system seems to defeat many of those incentives and calls into question why have all the incentives and complexity if you just turn around and create another level of complexity on top of it defeating the original purpose. Some might suggest this seems to be a fight between congress and itself.

Update: Tax Cuts and Jobs Act of 2017

Well, amazingly after almost 50 years, major changes to the AMT and good news came in 2017. Prior to the implementation of the Tax Cuts and Jobs Act of 2017 (TCJA), approximately 5 million taxpayers were impacted by AMT. The TCJA increased the AMT’s exemption and exemption phaseout through 2025, reducing the number of taxpayers subject to the AMT, to an estimated 200,000.3 While this has been great news, it is set to expire next year and if so, we will be right back where we started. Hopefully, congress will correct this and make it permanent before it expires next year.

Citation

1.      Bureau of Labor and Statistics (BLS) – Consumer Price Index (CPI) – annual inflation rate
https://www.bls.gov/cpi 

2.      Tax Foundation – Taxpayers subject to AMT
https://taxfoundation.org/blog/#21excludeGlossary/

3.      Tax Foundation – AMT Glossary
https://taxfoundation.org/taxedu/glossary/#23excludeGlossary/

4.      Tax Foundation – Background Individual AMT
https://taxfoundation.org/research/all/federal/#25excludeGlossary/

5.      Tax Foundation – The Tax Cuts and Jobs Act Simplified the Tax Filing Process for Millions of Households https://taxfoundation.org/research/all/federal/#28excludeGlossary/https://taxfoundation.org/research/all/federal/#29excludeGlossary/

6.      Business Insider – Billionaires avoiding paying federal income tax
https://www.businessinsider.com/#31excludeGlossary?op=1

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