History of the AMT

Legislative History of the AMT as Summarized by the Joint Committee on Taxation

Wednesday, January 26th, 2011 | Print This Post | Email This Post

As a part of its preparation for the House Ways and Means Committee hearings on fundamental tax reform, the Joint Committee on Taxation prepared a summary history of the Alternative Minimum Tax. Here is the Joint Committee’s report:

An add-on minimum tax was first enacted by the Tax Reform Act of 1969. The add-on minimum tax was repealed by The Tax Equity and Fiscal Responsibility Act of 1982. The add-on minimum tax, as originally enacted, generally was a tax at a 10-percent rate on the sum of the specified tax preferences in excess of the sum of $30,000 plus the taxpayer’s regular tax.

The 1982 Act enacted the first comprehensive individual AMT. Under the 1982 Act, in computing AMTI, the deduction for state and local taxes, the deduction for personal exemptions, the standard deduction, and the deduction for interest on home equity loans were not allowed. Incentive stock option gain was included in AMTI. These remain the principal preferences and adjustments under present law. The Tax Reform Act of 1986 largely retained the structure of the prior-law AMT, since 1986, several changes have been made to the computation of the individual AMT. The principal changes are set forth below:

Adjustments and preferences – The principal changes made in the determination of AMTI were to repeal the preference for charitable contributions of appreciated property; repeal the preference for percentage depletion on oil and gas wells; substantially reduce the amount of the preference for intangible drilling expenses; and repeal the requirement that alternative depreciation lives be used in computing the deduction for ACRS depreciation.

Rates – The Omnibus Budget Reconciliation Act of 1990 increased the individual AMT tax rate from 21 percent to 24 and the rate was further increased by the Omnibus Budget

Reconciliation Act of 1993 to the 26- and 28-percent rate structure of present law (when the maximum regular tax rate was increased from 31 percent to 39.6 percent).

Exemption amounts – The Omnibus Budget Reconciliation Act of 1993 increased the

AMT exemption amounts to $45,000 ($33,750 for unmarried taxpayers). The AMT exemption amounts were temporarily increased to $49,000 ($35,750 for unmarried individuals) for 2001 and 2002, to $58,000 ($40,250 for unmarried individuals) for 2003, 2004, and 2005, to $62,550 ($42,500 for unmarried individuals) for 2006, $66,250 ($44,350 for unmarried individuals) in 2007, $69,950 ($46,200 for unmarried individuals) in 2008, to $70,950 ($46,700 for unmarried individuals) in 2009, and $72,450 (($47,450 for unmarried individuals) for 2010, and $74,450 ($48,450 for unmarried individuals) in 2011.

Credits – For 1998 and subsequent years, the nonrefundable personal credits have been allowed on a temporary basis to offset the AMT. The last extension, through 2011, was enacted by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Source: Present Law and Historical Overview of the Federal Tax System, JCX-1-11, January 18, 2011.

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AMT 101

Friday, May 22nd, 2009 | Print This Post | Email This Post

It’s a pretty safe bet to say that the vast majority of folks do not have an understanding of the Alternative Minimum Tax. In this next “mini-series” of articles we’re going to try to give you just an outline of it, not a full-semester course as our title would indicate. This is an “audit” class only – there will be no exam at the end!

The AMT is often referred to as a “parallel” tax system, separate and distinct from what we’ll call the “regular” income tax. For the first hundred years of our income tax – since the Revenue Act of 1861, enacted to finance the Civil War – to the Tax Reform Act of 1969, U.S. taxpayers have had only one way to compute their annual income tax liability. For the past 40 years, however, we have had to do it two ways – with the privilege then of paying the higher of the two!

Calculating a tax liability essentially is simple math. We start by adding up a bunch of numbers representing the income we have earned during the year. This includes wages from our W-2s, interest, dividends, capital gains, and “all other income from whatever source derived,” to quote from the Internal Revenue Code. From this total we then subtract “deductions allowed by this chapter” to arrive at “taxable income.”

Code section 1: “There is hereby imposed on the taxable income of every individual a tax determined in accordance with the following tables….” The tax tables we use vary, depending on our “filing status” – single, married filing jointly, married filing separately or head of household.

So what’s different about the AMT?

The AMT follows the same basic math, but the big difference is what is included in the definition of “income” (it is more inclusive), and what deductions are “allowed” (fewer are allowed). AMT taxable income thus is, with very rare occasion, higher than our regular tax taxable income. In addition, the AMT has its own tax table, separate and distinct from the four listed above.

In our next article, we will give some examples to show how this works.

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Origin of the Alternative Minimum Tax – 1969 (yes, the same year as Woodstock)

Thursday, April 16th, 2009 | Print This Post | Email This Post

“Subchapter A of chapter 1 (relating to determination of tax liability) is amended by adding at the end thereof the following new part:

“Part VI – Minimum Tax for Tax Preferences

“Sec. 56. Imposition of tax.

“In addition to the other taxes imposed by this chapter, there is hereby imposed for each taxable year, with respect to the income of every person, a tax equal to 10 percent of the amount (if any) by which….”

With these words, and President Richard Nixon’s stroke of a pen on December 30, 1969, the monster parent of the current day Alternative Minimum Tax was born. Not unlike Dr. Frankenstein’s monster, the creators of the AMT had no concept of what its unfortunate consequences ultimately would turn out to be.

History generally attributes the origin of a minimum tax to testimony by Secretary of the Treasury Joseph Barr in Congressional committee hearings on the 1969 Tax Reform Act. In a comment that resulted in much publicity, and a general outcry from politicians and common folk alike, he noted that a whopping 155 people with adjusted gross incomes of over $200,000 had paid no taxes on their 1967 tax returns.

Of course, when a “good” idea like this originates, many people are anxious to take credit. Among the many of us back in D.C. who didn’t make it up to Woodstock, President Nixon himself claimed to have had the idea. From his Statement on Signing the Tax Reform Act of 1969:

“Eight months ago, I submitted a sweeping set of proposals to the Congress for the first major tax reform in 15 years, one which would make our tax system more fair.

“In terms of long-overdue tax reform, most of my major reform proposals were adopted.

“A large number of high-income persons who have paid little or no Federal income taxes will now bear a fairer share of the tax burden through enactment of a minimum tax comparable to the proposal that I submitted to the Congress, which closes the loopholes that permitted much of this tax avoidance.”

From this simple “fix” of the 155 non-taxpayer problem 40 years ago, the monster has evolved to where recent IRS statistics show that over 4 million taxpayers currently are paying the AMT!

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