Tax Center: Tax Changes 2003–2010

The discussion in this FAQ summarizes the current legislative status of the alternative minimum tax (AMT) and traces its recent history. The text is routinely updated for legislative developments.

Editor's Note (July 20, 2010): Senator Max Baucus, the chairman of the Senate Finance Committee, is holding discussions this summer about the tax agenda for the rest of 2010, including another extension of the AMT income exemption amounts to shield millions of middle-income taxpayers from the AMT. According to a news report by Fox Business, a spokesperson for the House Ways and Means Committee concurs that "Congress will patch the AMT for 2010." Further developments will be covered here.

AMT Relief

To keep middle-income people from being unfairly hit by the AMT, Congress has enacted temporary relief during each of the past few years, including new AMT credits specific to ISOs. The tactic has been to raise the AMT income exemption amounts slightly each year in accordance with inflation. Without these annual "patches" to control the spread of the AMT, the AMT exemption amounts would return to the low levels of 2000 ($45,000 for married joint filers and $33,750 for single filers), imposing the AMT on 30 million middle-income taxpayers it was never intended to tax.

President Barack Obama's economic-stimulus bill, the American Recovery & Reinvestment Act of 2009, included yet another AMT patch. The AMT income exemption amounts for 2009 were $70,950 for married joint filers and $46,700 for single filers (see a related FAQ on the likelihood of triggering the AMT with your income). Also, note that any income paid from private activity municipal bonds issued in 2009 or 2010 will no longer be included in the AMT income calculation.

For the first time in federal budget planning, President Obama's initial budget projection in February 2009 formally included the continuation of these annual AMT patches. This policy was affirmed in the budget resolution for the 2010 fiscal year that Congress approved on April 29, 2009 (see the details below).

However, near the end of 2009, leaders in the House of Representatives indicated that Congress will probably not consider an AMT patch for 2010 until some time during 2010. In its budget proposals for February 2010, the Obama administration again proposed permanently indexing the AMT income exemption amounts for inflation.

Budget Deficits Under President Bush

The formal inclusion of AMT patches in President Obama's budget projections should end the political wrangling about paying for AMT relief that has broken out in Congress during each of the past few years. A brief outline of recent AMT history shows the significance of this move.

While Congress has been passing annual AMT patches, it has never permanently indexed the AMT income exemption amounts for inflation. Under President George W. Bush, federal budgets for any given year disingenuously assumed that Congress would not pass an AMT patch, and that the income exemption amounts would therefore drop to the low levels of 2000. Spending in the budget was raised accordingly. However, because Congress did pass annual patches, the real AMT revenue always fell short of the AMT revenue expected by the budget in its spending plans.

This gap between assumed and actual AMT revenue had grown to $70 billion by the time of the 2009 AMT patch (the last one to be left out of a federal budget). Without corresponding tax increases elsewhere, any difference between spending and revenue must be borrowed, adding to the huge and growing national debt.

Political Battles

During the Bush years, these circumstances set up a pattern of political trench warfare that had become predictable by 2007. Every time Congress considered an annual AMT patch, Democrats in Congress proposed to pay for the AMT relief, and thus meet budget spending, by raising taxes elsewhere, especially for corporations and investment managers. However, Republicans always stiffly opposed tax hikes because they felt these might damage the economy. Democrats retorted that raising tax rates for big business and the wealthy would be better than worsening the already immense federal budget deficit by borrowing to pay for AMT relief. Back and forth it went.

Helped by the veto power of President Bush, the Republicans won during his presidency: the AMT patches of the past few years were approved without offsets, and the national debt grew accordingly. Now, however, the honest recognition of annual AMT patches, indexed for inflation, in the federal budget will remove the disparity between assumed and actual AMT revenue, and by extension will remove any need to discuss offsets to pay for AMT relief.

Repeal?

Some legislators in Congress want to repeal the AMT entirely. However, the huge federal deficit will make it hard for Congress to abolish a meaningful stream of revenue such as the AMT. The intense quarrels in Congress over offsetting mere AMT relief suggest that a much larger battle would be fought over offsetting actual AMT repeal.