Alternative Minimum Tax (AMT)

What Is Alternative Minimum Tax?

Alternative Minimum Tax (AMT) is a tax system designed to ensure high-income individuals, corporations, trusts, and estates pay a minimum amount of tax. AMT limits certain deductions and credits that would otherwise reduce tax liability under the regular tax system.

How Does Alternative Minimum Tax Work?

People or organizations who may be subject to AMT must first calculate their tax liability under the regular tax system and then calculate their AMT liability separately. (See below on how to calculate your AMT liability) If the AMT calculation is higher than the regular tax calculation, the AMT amount must be paid.

The easiest way to determine if you owe AMT is to use IRS Form 6251.

Who Has to Pay Alternative Minimum Tax?

AMT generally impacts high-income individuals and those with significant deductions for state and local taxes, large capital gains, or incentive stock options (ISO). If your income is higher than the AMT exemption amounts, you may be responsible for AMT.

What Are the AMT Exemption Amounts for 2025?

The AMT exemption amounts for the 2025 tax year are $88,100 for single filers, $137,000 for married couples filing jointly, and $68,500 for married couples filing separately. If your 2025 income exceeds these amounts, you may be liable for the alternative minimum tax in 2026.

AMT Tax Rates

Unlike the regular tax system, which has multiple tax brackets, the Alternative Minimum Tax has only two tax rates: 26% and 28%. These rates apply to your Alternative Minimum Taxable Income (AMTI) after accounting for the AMT exemption amount.

AMT Tax Brackets for 2025

For the 2025 tax year, the AMT rates are:

• 26% AMT Rate: Applies to AMTI up to $239,100 (single, head of household, and married filing jointly filers) or $119,550 (married filing separately).
• 28% AMT Rate: Applies to AMTI greater than $239,100 (single, head of household, and married filing jointly filers) or $119,550 (married filing separately).

AMT Exemptions and Phaseouts

For the 2025 tax year, the AMT exemptions are:

• Single filers: $88,100
• Married filing jointly (MFJ): $137,000

These exemptions begin to phase out when AMTI exceeds $626,350 and phase out completely when AMTI exceeds $978,750 for single filers. The phaseout range starts at $1,252,700 of AMTI for married joint filers and phases out completely when AMTI exceeds $1,800,700.

How to Calculate Alternative Minimum Tax (AMT)

AMT is calculated by adding back certain items like state and local tax deductions, certain business depreciation, and tax-exempt interest to determine the AMTI. Then, a flat AMT tax rate is applied to the AMTI above a certain exemption amount - which varies based on inflation each year.

For example, if you’re a married couple filing jointly with an AMTI of $500,000:

• Your AMT exemption amount is $137,000, so your taxable AMTI is:
  $500,000 - $137,000 = $363,000
• The first $239,100 is taxed at 26%:  $239,100 × 0.26 =$62,166
• The remaining $123,900 is taxed at 28%: $123,900 x 0.28 = $34,692

This means your AMT tax liability would be $96,858, and if this is higher than your regular tax calculation, you must pay the AMT amount instead.

How To Avoid AMT

By carefully managing deductions and income sources, high earners can minimize their AMT liability. Strategies such as spreading out income, disqualifying dispositions of incentive stock options, and using tax-efficient investments can help. Understanding AMT can help you avoid unexpected tax bills. Consider working with a financial planner for tax management to develop a strategy that minimizes your AMT exposure and maximizes your deductions legally.