Citation URL: http://www.urban.org/BenjaminHHarris

The tax code limits the extent to which individuals may take advantage of the tax benefits associated with traditional and Roth IRAs. The only eligibility criteria for contributing to a Roth IRA are income and filing status. In contrast, eligibility for deducting contributions to a traditional IRA depends on those factors as well as on whether the taxpayer and the taxpayer’s spouse participate in an employer-provided pension. Taxpayers are subject to an assortment of phaseout ranges based on those criteria.

Recent tax acts sharply lowered tax rates on long-term capital gains and dividend income. For millions of taxpayers, however, the alternative minimum tax limits the benefits from these cuts by increasing the effective marginal tax rates on capital gains and dividend income. The culprit is the phaseout of the AMT exemption.

The practice of requiring well-to-do Americans to pay a minimum tax was developed more than three decades ago. In January, 1969, then-Treasury Secretary Joseph W. Barr informed Congress that 155 individual taxpayers with income exceeding $200,000 paid no tax in 1966. The news set off a political firestorm that resulted in the creation of a minimum tax. Under current law, 36 million taxpayers will be subject to the current minimum tax by 2010. This Issues and Options paper examines how tax designed to target 155 taxpayers grew so dramatically, the economics of the AMT, and the options for reform.

Originally targeted at high-income households, the individual alternative minimum tax (AMT) is now on the verge of switching from a "class" tax to a "mass" tax. Under current law, the AMT will encroach dramatically on the middle-class over the next decade and will become the de facto tax system for upper-income households. These changes occur because of the non-indexation of the AMT for inflation and the tax cuts enacted in 2001. The trends are troubling because the AMT is notoriously complex, its effects on efficiency and equity are questionable, and its underlying purpose is controversial. This paper provides information on the AMT, its economic effects, and options for policy reform, and is intended to help inform the debate and the eventual reforms that will be required in the near future.

These facts and projections highlight the increasing role of the AMT, and the problems it poses. The facts are based on the discussion paper "The Individual AMT: Problems and Potential Solutions." The Tax Reform Act of 1969 created a minimum tax designed to ensure that individuals with high incomes did not take what was deemed undue advantage of tax laws to avoid federal income tax liability. The individual AMT is now on the verge of switching from a "class" tax to a "mass" tax. The trends are troubling because the AMT is notoriously complex, its effects on efficiency and equity are questionable, and its underlying purpose is controversial.

The alternative minimum tax was created in 1969 to ensure that high-income taxpayers did not exploit tax laws to reduce or eliminate their federal income tax. By 2010, it is expected to affect 36 million taxpayers, particularly upper-middle-class families with children. This slide show provides an overview and history of the tax; Tax Policy Center projections; an examination of equity, efficiency, and complexity issues; and reform options. The show is based on the discussion paper "The Individual AMT: Problems and Potential Solutions."

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