A new report from the Congressional Research Service highlights the need for legislative action on the alternative minimum tax (“AMT”). Without a change in the law, some 34 million taxpayers will incur this tax in 2012.
The AMT was originally created with the notion that it would apply only to a small number of high-income taxpayers whose use of deductions, credits and exclusions would otherwise permit them to pay little or no tax. It computes tax according to an alternative set of rules, determining (in theory) the minimum amount that should be paid. If regular income tax falls below this minimum, the taxpayer must pay AMT to make up the difference.
A special deduction called the AMT exemption amount protects most low- and middle-income taxpayers from paying AMT, but this number has not been permanently indexed for inflation. Instead, every year or two, Congress makes a temporary fix that has become known as the AMT patch. The most recent one covered 2010 and 2011, and carried a price tag of $135 billion. Both political parties agree on the need to prevent the AMT exemption amount from reverting to a lower level, but disagreement over the manner of doing this has made it difficult to enact the necessary legislation.
Adding to the difficulty, the cost in government revenue of extending this patch into the future increases geometrically each year. If paired with an extension of the Bush tax cuts, the estimated cost of a 10-year extension of the AMT patch is $2.7 trillion, and no, that’s not a typo. It will be interesting to see how this problem is addressed — if at all — by the so-called super committee charged with finding ways to reduce the federal budget deficit.
