Repeal the Individual AMT
There is no more urgent priority for change in the tax law than repeal of the individual AMT. The individual AMT no longer serves the purpose for which it was enacted, produces enormous complexity, and has unintended consequences for many taxpayers.
Originally enacted in 1969 to address concerns that persons with significant economic income were paying little or no Federal taxes because of investments in tax shelters, the AMT today has little effect on its original target and increasingly affects an unintended class of taxpayers – the middle class – not engaged in tax-shelter or deferral strategies. The individual AMT creates a "parallel tax universe" that imposes a major compliance burden on numerous taxpayers without a significant policy justification. If Congress wants to disallow a deduction, credit or exemption, then Congress should do so for all taxpayers and not just for purposes of an AMT that requires taxpayers to whom it may apply to do the complicated calculations required to determine whether it does apply.
More important for this Committee, however, is what will happen with the individual AMT in the future. The threshold for the AMT is not indexed for inflation and that threshold has not been modified since the late 1980s. The Treasury Department estimates that the number of taxpayers subject to the AMT will increase from the current 1.4 million in 2001 to 17 million in 2010.
The AMT's failure to achieve its original purpose is attributable to the numerous changes to the Internal Revenue Code since 1969 specifically limiting tax-shelter deductions and credits. Studies indicate that, by 2007, almost ninety-five percent of the revenue from AMT preferences and adjustments will be derived from four items that are "personal" in nature and not the product of tax planning strategies – the personal exemption, the standard deduction, state and local taxes, and miscellaneous itemized deductions. Further, the interaction of the AMT with a number of recently enacted credits intended to benefit families and further education means that even individuals who ultimately have no AMT liability will suffer because the AMT reduces the benefits conferred by those credits. The AMT is too complex and imposes too great a compliance burden. Significant simplification would be achieved by its repeal.
Alternatively, if repeal is not feasible, some simplification could be achieved by (i) excluding taxpayers with average adjusted gross income below a certain threshold from the AMT system, (ii) examining each preference and adjustment item separately to determine whether it should be retained in the AMT system, although, in our view, proper analysis of each item of adjustment and preference would result in the AMT system being repealed, (iii) repealing two preference items that present glaring problems – the denial for AMT purposes of any deduction for miscellaneous itemized deductions and the adjustment for ISO stock, which inappropriately taxes a portion of the gain at a rate in excess of the maximum twenty percent that Congress intended be applied to long-term capital gains, or (iv) indexing the rate brackets and the exemption amount.
We emphasize our view that what is required is total repeal of the individual AMT, and not just limiting its application to taxpayers with income above a stated threshold. Such a limitation will eliminate the actual impact of the AMT on some taxpayers – which is good – but it will not reduce the compliance burden for millions of taxpayers, and it will create new complexity as a result of thresholds and phase-outs for this new limitation.