Alternative Minimum Tax

Myths and Realities about the Alternative Minimum Tax

Public discussion of issues surrounding the AMT suffers from several misconceptions, which seem to be widespread among policymakers and many media outlets.

Myth 1:
The AMT is (or is rapidly becoming) a "middle-class" tax.

Myth 2:
The growth in the AMT was unanticipated and accidental, and so the cost of repeal should not have to be offset.

Myth 3:
The only way to protect middle-class households from the AMT is to repeal it.

Background

The Alternative Minimum Tax was created in 1969 to ensure that the highest-income households could not exploit loopholes, exclusions, and deductions to avoid paying any federal income tax.  The AMT acts as a stop-gap tax system, with taxpayers owing their regular income tax or AMT liability, whichever is higher.

Because the AMT parameters were never indexed for inflation, and because the 2001 and 2003 tax cuts substantially lowered taxpayers’ liability under the regular income tax without changing the structure of the AMT, the tax will affect a rapidly increasing number of taxpayers in future years in the unlikely event that no changes are made.  Thus there is bipartisan agreement on the need for changes in the AMT.  Congress disagrees, however, on whether the tax should be repealed or reformed (and if so, how).