Honey, I Shrunk the AMT (But It’s Not Gone)
The tax act Congress passed early on New Year’s Day permanently patched the alternative minimum tax (AMT), sparing tens of millions of Americans from the additional levy. But it won’t protect everyone. The AMT will continue to raise the taxes of a few million taxpayers each year, often in seemingly capricious ways. And more and more Americans will owe AMT in future years.
New estimates from the Tax Policy Center project that 3.9 million taxpayers will pay an average of about $6,600 in AMT for 2013, increasing their average effective tax rate by 1.7 percentage points. And the percentage of taxpayers who owe the additional tax—4.2 percent this year—will rise steadily over the next decade before leveling off at about 5.5 percent. That means more than 6 million taxpayers will pay AMT in 2023.
As in the past, married couples, families with more children, and people living in high-tax states will be most likely to incur the added tax. Taxpayers with income between $200,000 and $1 million will be most affected: about one-third of them will owe AMT.
For nearly a decade, Congress temporarily adjusted the AMT exemption every year or two to keep the tax from hitting millions of unsuspecting taxpayers. Those fixes often came late in the year, creating a lot of uncertainty for taxpayers. The American Taxpayer Relief Act of 2012 (ATRA) permanently indexed the exemption and other AMT parameters. Congress might have gone the extra mile and eliminated the AMT entirely, but that would have cost more than $350 billion in lost revenue over the next decade.
So the AMT lives on, complicating the tax returns of more Americans every year. For many, it will come as a nasty surprise: new AMT taxpayers often learn about the bonus tax only when a letter from the IRS tells them they owe extra tax plus interest and possibly penalties.
And, as bad tax policy as it is, the AMT is unlikely to go away—not unless comprehensive tax reform finally rids us of this tax code abomination.