What is the Alternative Minimum Tax (AMT)?

The Alternative Minimum Tax (AMT) is a separate tax calculation designed to prevent certain high-income taxpayers from reducing their tax bills too much through deductions and credits. It was introduced in 1969 after concerns that some wealthy individuals weren’t paying any federal income tax. 

Unlike the regular tax system, the AMT calculates income and taxes owed using different rules. While only a small percentage of people are impacted by it today, understanding how it works is still important, especially if your income or deductions place you in a higher bracket.

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The Basics: How Does the AMT Work?

The AMT runs alongside the regular tax system. Each year, certain taxpayers have to figure out their taxes twice. Once under the standard rules and once under the AMT rules. If the AMT amount is higher, that’s what they pay. 

Regular Tax vs. AMT Calculation

Under the regular tax system, most people calculate their taxes based on adjusted gross income, take deductions, apply credits, and use the standard tax brackets. However, if you’re subject to the AMT, the steps are a bit different. 

You’ll need to calculate your Alternative Minimum Taxable Income (AMTI). This starts with your regular income but adds back some deductions that aren’t allowed under AMT rules, such as certain state and local taxes or miscellaneous itemized deductions. 

Once you have your AMTI, you subtract the AMT exemption amount, then apply the AMT tax rates. You end up paying whichever is higher, your regular tax or the AMT.

Key Components of AMT

The AMT starts with calculating AMTI, which includes adding back items that the regular tax system lets you deduct. For example, you might have to include state taxes or certain types of bond interest. 

Next, there’s a flat exemption based on your filing status. Then the tax is applied using just two rates: 26% and 28%.

Your final AMT bill depends on how much your AMTI exceeds the exemption amount and if you fall into the higher of the two rates. 

Who Pays the AMT?

Most people no longer have to worry about the AMT, but it still affects some high-income households. It all depends on your income, deductions, and how certain financial moves are taxed. 

Current AMT Demographics

Today, the AMT applies to a very small group, less than 0.1% of taxpayers. It often shows up for those with higher incomes, especially between $200,000 and $1 million.

People who are most likely to face the AMT often receive income from incentive stock options or taxable bond interest. If you live in a state with high income or property tax, that could increase your chances as well.

What Triggers the AMT?

There are a few common situations that push someone into AMT territory. Exercising incentive stock options (ISOs) is a big one because the spread between your grant price and market price is added back into your income under AMT rules.

Other triggers include high state and local tax (SALT) deductions and income from private activity bonds. Some professions, especially in tech or finance, may come across this more often.

Remember, though, triggering the AMT doesn’t always mean you’ll owe it. It just means you’ll need to calculate both tax methods to see which one applies. 

AMT Tax Rates and Exemptions

The AMT doesn’t use the same tax brackets as the regular tax system. Instead, it relies on flat rates and exemption amounts based on your filing status. These details affect how much AMT, if any, you’ll owe.

2025 Exemption Thresholds

If you’re subject to the AMT, you can subtract an exemption amount from your AMTI before the AMT rates apply. The exact exemption depends on your filing status. For 2025, the IRS lists the following:

• Single or Head of Household: $88,100
• Married Filing Jointly: $137,000
• Married Filing Separately: $68, 650

These exemption amounts adjust each year for inflation. They reduce the amount of your income taxed under the AMT system, but they start to phase out once your income reaches certain levels.

Phaseout Limits

Your AMT exemption begins to shrink once your income exceeds a certain level. This is known as the phaseout. For 2025, the phaseout starts at:

• $626,350 for single filers
• $1,252,700 for married couples filing jointly

As your income increases beyond these thresholds, the value of your exemption drops until it’s eventually eliminated. That means higher-income earners are more likely to be fully exposed to the AMT and see a larger tax bill.

AMT Adjustments and Preference Items

When calculating AMTI, some deductions and income types allowed under the regular tax system have to be added back. These are called adjustments and preference items, and they’re a big reason why someone may end up owing AMT instead of regular tax. 

Common AMT Add-Backs

Several tax breaks that lower your regular tax bill may not apply under AMT rules. Common add-backs include:

• State and local tax (SALT) deductions
• Incentive stock option (ISO) bargain elements
• Private activity bond interest
• Excess depletion or depreciation deductions

These items get added back into your income for AMT purposes, which increases your AMTI and your chance of paying AMT. 

The Tax Cuts and Jobs Act (TCJA) reduced how often these add-backs occur by limiting or eliminating many deductions on the regular tax side. However, they’re still worth watching, especially if you have stock options or certain types of investment income. 

What’s Still Exempt or Treated Differently

Many deductions that used to trigger the AMT were removed or limited by the TCJA, so they no longer factor into AMTI. For example, personal exemptions and some miscellaneous deductions no longer apply under either tax system. 

However, interest from municipal bonds is still relevant, especially if it comes from private activity bonds, which are often included in AMTI.

So while the AMT is less common today, certain income types and deductions still require a closer look when preparing your return. 

Also, state and local tax deductions were completely disallowed under pre-TCJA AMT rules, but are now capped at $10,000 under regular tax. 

How the TCJA Changed the AMT

The TCJA, passed in 2017, made major changes to the AMT. It raised exemption amounts and adjusted phaseout thresholds. As a result, far fewer people are impacted by the AMT today.

Pre vs. Post-TCJA Impact

Before the TCJA, more than 5 million taxpayers were subject to the AMT. In 2017, the exemption for married couples filing jointly was $84,500, and, after the law was passed, that exemption jumped to $109,400 in 2018.

By 2018, only around 200,000 taxpayers had to pay it. The TCJA also limited certain deductions that used to trigger AMT, such as state and local taxes and personal exemptions.

These changes made it much less likely for middle-income households to owe AMT, though higher earners still need to check each year. 

Will the AMT Return in 2026

Many of the TCJA provisions are set to expire after 2025. If a new law is not passed, the AMT could once again apply to millions of taxpayers. 

The Congressional Budget Office projects that 7.3 million people might be affected in 2026 if current rules expire. That’s why you need to start planning now, especially if your income or deductions could put you at risk of AMT when the tax rules change. 

Claiming the AMT Credit

If you’ve paid the AMT in a previous year, you may be able to get some of it back through the AMT credit. This credit applies when the AMT you paid was due to timing differences, like exercising incentive stock options. 

In future years, when you don’t owe AMT, you may be able tocan use the credit to lower your regular tax bill. It doesn’t always apply immediately, but over time it helps you recover part of the extra tax you already paid. 

Strategies to Reduce or Avoid the AMT

While you can’t always avoid the AMT, there are ways to lower the chances of owing it or reducing the amount you’ll have to pay. These strategies focus on managing income, deductions, and the timing of certain financial decisions. 

Income and Investment Timing

Some types of income can trigger the AMT depending on when they’re received. For example, if you plan to exercise ISOs, doing it in smaller amounts over time helps spread out the AMT impact. 

It also helps to be careful with private activity bond interest or large state and local tax payments, which might count toward your AMTI.

You can also look at the timing of deductions or big income events. Coordinating these so they don’t all hit the same year may keep you below the AMT exemption phaseout range. 

Using Tax Planning Services

Tax planning becomes more important when the AMT becomes a possibility. Working with a financial advisor or CPA on tax optimization can help you model different scenarios and estimate your AMT exposure beforehand. They can review year-end tax projections, timing decisions for ISOs, or when to make estimated tax payments. 

Final Thoughts on AMT

The AMT doesn’t affect most people, but if you fall into a higher income bracket or have specific types of income and deductions, it’s something to keep an eye on. Understanding how it works, and knowing if you’re at risk, helps you make better decisions and avoid surprises during filing season. 

Even though fewer people pay the AMT today, that might change after 2025. Planning now puts you in a better position, especially if the rules change again.

Key Takeaways

• The AMT is a separate tax system designed to limit deductions for high-income earners.
• It uses different calculations, exemptions, and tax rates than the regular system.
• Common AMT triggers include incentive stock options, private activity bond interest, and high state and local taxes.
• The TCJA reduced how many taxpayers owe the AMT, but those provisions might expire in 2026.
• AMT credits may be available in future years if you paid AMT because of timing-based differences.

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Action Items

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FAQs

Who does the 15% alternative minimum tax apply to?

The 15% alternative minimum tax applies to certain large corporations under the Corporate AMT, not individual taxpayers. It was introduced as part of the Inflation Reduction Act and targets companies with over $1 billion in average annual financial statement income.

What are the exclusion items for AMT?

Exclusion items for AMT are income or deductions that are treated differently under AMT rules. Common examples include state and local tax deductions, incentive stock option income, and private activity bond interest. These are added back to calculate AMTI and can increase the chance of owing AMT. 

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