Now that Democrats have taken control of the House, some lawmakers are looking for ways to rewrite the 2017 Tax Cuts and Jobs Act. There are opportunities to improve the law, but also pitfalls that could make it worse. In a series of three blogs, the Tax Policy Center’s Rob McClelland looks some potential reforms. This one looks at the Alternative Minimum Tax.
The Tax Cuts and Jobs Act (TCJA) dramatically reduced the number of taxpayers who pay the individual alternative minimum tax (AMT). But, like nearly all the law’s individual income tax provisions, AMT relief ends after 2025 and millions of taxpayers would land back on the parallel tax. Although that change would generate substantial federal revenue, those taxpayers (including many upper middle- income households) would once again have to comply with the AMT’s complicated rules. Instead of reverting to the pre-2017 AMT, Congress could keep the AMT as it is today and raise more revenue by retaining two other features of TCJA also due to expire–the $10,000 limit on the deductibility of state and local taxes and the limit on the deductibility of mortgage interest to $750,000 of mortgage debt).
The modern AMT was developed in 1979. Under this approach, taxpayers pay the greater of income taxes computed under the regular system or the AMT. Although the AMT was supposed to apply to a few very high income households, the number paying the tax grew for two reasons. First, prior to 2012 the regular tax system was adjusted for inflation while the dollar thresholds in the AMT were not. This meant that as incomes rose more taxpayers fell into the alternative tax. Second, Congress has lowered individual income tax rates over time. Taxpayers owed less in regular income tax, but because the AMT rates were not reduced, many were forced to pay the AMT instead.
The original intent behind the AMT – ensuring that the highest income earners pay some taxes – was lost. By 2017, less than one in five households with incomes greater than $1 million paid the tax while nearly 80 percent of AMT taxpayers had incomes under $500,000.
By raising both the exemption amount and the income level at which the exemption phases out, the TCJA dramatically reduced the number of taxpayers subject to the AMT from about 5 million to just 200,000 in 2018, according to Tax Policy Center estimates. For instance, for joint filers, it increased the exemption amount from $84,000 in 2017 to $109,400 in 2018 and raised the income level where it phases out from $160,900 to $1 million. But these changes came at a cost: The Joint Committee on Taxation estimates they will reduce federal revenue by $637 billion over ten years.
How can Congress make up that lost revenue without bringing back the much more expansive version of the AMT in 2026? One way would be to extend both the AMT and some other revenue-raising provisions that are also set to end in 2025, such as the $10,000 limit on the deduction of state and local taxes and the limit on the deductibility of mortgage interest (limited to interest on $750,000 of mortgage principal). TPC estimates that extending the AMT provisions, the limit on state and local tax deductions and the limit on mortgage interest deductions contained in the TCJA would raise revenues by nearly $97 billion in 2027. In subsequent years, this combination would avoid the complexity of the prior law AMT without the revenue loss.