Millions of Individual Taxpayers May Heave a Temporary Sigh of Alternative Minimum Tax Relief

By Gabriel Aitsebaomo

Overview
On May 17, 2006, President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA” or “Act”), a measure designed to shield millions of taxpayers from the individual alternative minimum tax (AMT) in 2006.1 Prior to TIPRA, an estimated 19 million taxpayers (mostly middle to upper middle class taxpayers) would have been subject to the AMT in 2006.2 Through TIPRA, Congress attempts to reduce the number of AMT taxpayers by providing temporary increases in the AMT exemption and by allowing the use of certain tax credits. The AMT exemption amount for 2006 is increased from $58,000 to $62,550 for married couples filing a joint return, and from $40,250 to $42,500 for unmarried taxpayers.3 Additionally, the Act allows taxpayers to temporarily use nonrefundable tax credits to offset their AMT liability.4 Because the benefits of TIPRA are scheduled to end after 2006, the number of taxpayers subject to the AMT could mushroom to 23 million by 2007 if Congress fails to intervene further.

What is the Individual AMT?
The individual AMT is a tax imposed in addition to a taxpayer’s regular federal income tax liability when the amount calculated under the AMT formula produces a greater amount than the tax liability calculated under the regular federal income tax regime. For example, if an individual’s tax liability determined under the regular federal income tax regime is $1,000, but the same individual’s tax liability calculated under the AMT regime produces $1,500, then the individual’s AMT liability is $500 ($1,500 - $1,000). Because the AMT is a separate tax in addition to the regular federal income tax, the individual’s total federal income tax liability (under the above example), before any applicable credits, would be $1,500.

Why Did Congress Enact the Individual AMT?
Congress enacted the add-on minimum tax in 1969, after the testimony before Congress by Treasury Secretary Joseph Barr that 154 individuals with adjusted gross income of $200,000 or more paid no federal income tax by using various tax preferences or tax loopholes to eliminate their tax liability.5 To combat this perceived abuse by high-income individuals, Congress enacted the add-on minimum tax to ensure that no taxpayer with substantial economic income can avoid paying any federal income tax.6 The AMT, which was the successor to the add-on minimum tax, was passed in 1978.

Who is Subject to the AMT and Why?
In 2001, approximately 1.3 million taxpayers were subject to the AMT.7 By 2004, however, the number increased to 3 million and is expected to swell to 23 million by 2007 unless Congress intervenes.8 In terms of incomes, the bulk of the AMT payers come from taxpayers with adjusted gross incomes between $100,000 and $500,000.9 Over time, taxpayers with adjusted gross incomes between $50,000 and $100,000 will eventually be affected.10 Married taxpayers filing joint returns are more likely to be subject to the AMT than single taxpayers or heads of households.11 Likewise, taxpayers with large families and those who itemize with large state and local property taxes are more likely to be subject to the AMT than taxpayers with smaller families or smaller itemized deductions.12 This is because the personal and dependency exemptions, as well as deductions for state and local property taxes, which are allowed in computing the regular federal income tax liability, are disallowed in computing the AMT.13
More and more taxpayers are being pushed into the AMT brackets, and the trend will continue unless Congress acts. Two principal reasons account for the escalating number of taxpayers subject to the AMT. First, unlike the regular federal income tax system, where the basic standard deductions and the personal dependency exemptions are indexed for inflation, the AMT exemptions are not.14 The AMT regime disallows any deductions for personal or dependency exemptions, the standard deductions, or any deduction for property taxes.15 Second, the 2001 and 2003 Bush tax cuts have had the effect of reducing the regular federal income tax liabilities, without any corresponding reduction in the AMT liability.16

Conclusion
Although millions of taxpayers may heave a sigh of relief because TIPRA spares them from the AMT in 2006, such sighs may prove short-lived if Congress fails to extend the benefits of TIPRA beyond 2006.

Gabriel Aitsebaomo earned his J.D. from Thurgood Marshall School of Law and his LL.M in Taxation from the University of Florida. He also is a CPA. Aitsebaomo is an assistant professor of law at Thurgood Marshall School of Law and a member of The Houston Lawyer editorial board.

Endnotes
1. Bush Signs Tax Cut Package as Taxwriters Move to Trailers, 2006 TNT 96-2 (May 18, 2006). 2. See, Gregg Esenwein, The Alternative Minimum Tax (AMT): Income Tax Entry Points and “Take Back” Effects, CRS-2 (Feb. 10, 2005). 3. See HR 4297, 109th Congress 2nd Sess., Title III Sec. 301(a). 4. Id. 5. See S. REP. No. 91-552, at 302 (1969) as reprinted in 1969 U.S.C.C.A.N. 2027; HR 13270, 91st Cong. (1969). 6. See Tax Reform Act of 1969 §301 Pub. L. No. 91-172, 83 Stat. 487 (1969); see also, Tax Reform Act 1978, Pub. L. No. 95-600, §421, 92 Stat. 2871-72 (1978). 7. Staff of Joint Comm. On Taxation, 107th Cong., Study of Overall State of the Federal Tax System and Recommendation for Simplification, Pursuant to section 8022(3)(B) of the Internal Revenue Code of 1986, at 17. 8. Gregg Esenwein, CRS Updates Report on Potential AMT Distributional Effects, 2006 TNT 115-34 (June 15, 2006) 9. Id. 10. Id. 11. Id. 12. Id. 13. I.R.C. §56(b)(1). 14. Esenwein, Supra note 8. 15. I.R.C. §56(b)(1). 16. Esenwein, Supra note 8.

Text is punctuated without italics.

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