1The original purpose of the Alternative Minimum Tax (AMT) was to prevent a smallnumber of taxpayers with very high gross incomes from using tax preferences(exclusions, deductions, and credits) to avoid paying income taxes. As currentlystructured, however, the number of taxpayers owing federal AMT is projected toskyrocket. One recent estimate anticipates that 36 million taxpayers will be affected byAMT by 2010.
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California has a state level AMT similar to the federal AMT. Beginningwith the 1998 tax year, California attempted to forestall the projected rapid increase inthe number of taxpayers subject to the AMT by indexing for inflation its AMTexemptions and exemption phase-out levels. Despite this reform, the number of taxpayers paying California AMT doubled from approximately 11,000 in 1998 to morethan 22,000 in 2000, and the amount of AMT that they paid nearly quadrupled from $66million to $243 million (see Chart 1). This unexpected growth in the AMT prompted theFranchise Tax Board (FTB) to collect and analyze data from tax returns reporting anAMT for tax year 2000. The results of this analysis are presented below.
Chart 1Resident, Timely Filed, CA PIT AMT($ Millions)71616614224376050100150200250199619971998199920002001
The primary finding of this study is that the unexpectedly high levels of AMT in 2000 areattributable to an increase in the value of qualified stock options. In 2001, AMTcollections returned to close to their 1998 level. This suggests that the dramatic increasein stock options in 1999 and 2000 was an anomaly. Another interesting finding from thisanalysis is that almost 20 percent of California AMT filers are minors with unearnedincome. The amount of AMT paid by minors is relatively small, however. The lastsection of this paper presents descriptive statistics on the number of Californians whoseAMT was large relative to their adjusted gross income. The data suggest that the number of taxpayers facing severe financial hardship from the AMT may be less than has beenimplied by some accounts of this issue in the popular press.
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Burman, Leonard E., William G. Gale, Jeffery Rohaly, and Benjamin H. Harris, “The Individual AMT:Problems and Potential Solutions,”
National Tax Journal
, Vol. LV, No. 3, September 2002, pp. 555 - 596.
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