Contributing Author: Jim Young
The alternative minimum tax (AMT) was put in place in 1969, and it has been a controversial part of the tax law ever since. Taxpayers who are subject to the AMT discover that many of the tax benefits received when computing the regular income tax liability are taken away for AMT purposes. This provides confusing incentives to taxpayers. For example, Congress encourages taxpayers to invest in oil and gas ventures by providing tax deductions and credits against the regular tax for oil and gas investors. Yet, some of these benefits are taken away when computing the AMT, which reduces the incentive to invest in oil and gas.
The Tax Cuts and Jobs Act of 2017 repealed the corporate version of the AMT, and many taxpayers hoped that the individual AMT would also be repealed. However, the individual AMT was retained. In 1969, approximately 20,000 individuals were subject to the AMT, and this number soared to over 5,000,000 by 2017. So, the AMT increases the tax burden and tax complexity for many taxpayers. Critics of the AMT point out that it no longer affects only high-income taxpayers, as originally intended, but now also affects many middle-class taxpayers.
The Tax Cuts and Jobs Act of 2017 did make some important changes to the AMT. The AMT exemption was increased approximately $4,000 for couples ($3,000 for individuals), so that the AMT will not apply to a married-filing-joint return (individual return) in 2018 unless AMT income exceeds $191,500 ($95,750). While these increases were modest, the AMT phase-out thresholds more than doubled to $1 million ($500,000). Therefore, many middle-income families that were subject to the AMT in the past will be able to avoid the individual AMT in 2018. The Joint Committee on Taxation estimated that the AMT changes would reduce federal revenues by $637.1 billion over the next ten years as compared to the previous law.
Topics To Discuss With Students
- Why do you think the corporate AMT was repealed but the individual AMT was retained?
- One goal of the AMT is to ensure that all high-income taxpayers pay at least some federal income tax. Describe a method other than the AMT that would also meet this objective and that would be significantly less complex than the AMT.
- Do you think the changes made by the Tax Cuts and Jobs Act of 2017 have effectively repealed the individual AMT? Why or why not?
Ideas for Class Assignments
- Provide five examples of tax deductions or credits that are allowed for regular tax purposes, but not for the AMT. For each one indicate how the AMT adjustment or preference might negatively impact the industry affected by this tax item.
- Assign a student or a group to debate one side of the following issue with another student or group: The individual AMT has a positive effect on the growth of small businesses in the United States.
- Have the students write a letter to their House representative or Senator explaining their concern(s) for the current rules for the individual AMT, and an alternative that is not as complex.
Resources
- Republicans Know This Tax Is An “Abomination”. So Why Is It Still In Their Bill?
- Was the AMT Effectively Repealed?
- The Alternative Minimum Tax is No Longer as Effective as It Was
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