What Is the Alternative Minimum Tax (AMT)?

The AMT is a second, more stringent way to calculate your tax bill. Each year, when you complete your federal tax return, you compare your tax liability under the regular tax system to the AMT liability and pay the higher of the two. This process ensures that high-income households pay their fair share of taxes through the removal of certain adjustments and deductions.

It's perhaps easiest to envision the AMT as a floor that keeps your tax liability from going below a certain level. Once your tax rate drops to that floor, the AMT won't allow it to go any lower.

Originally, the AMT was intended to crack down on high-income households who had so many tax deductions and tax credits that they paid little to no federal income taxes. The AMT was devised to target a small number of very wealthy taxpayers who were exploiting tax loopholes. Gradually, however, inflation caused many households' income to rise making them look like higher income taxpayers. Essentially, inflation outpaced the AMT so much that normal households started to be impacted by a tax that was intended for only the wealthiest taxpayers.

When Congress passed the Tax Cuts and Jobs Act (TCJA) in December 2017, the AMT rules significantly changed, significantly reducing the number of taxpayers impacted by the AMT. However, these tax law changes are temporary and apply only to tax years 2018 to 2025 unless Congress extends them or makes them permanent.

To determine if the AMT will impact you, first calculate your regular tax liability using IRS Form 1040. Then, using IRS Form 6251, do your AMT calculation.

The amount of income you have under the AMT might increase, since you need to add back some types of income that would normally be tax-free under the regular income tax system. One example is tax-exempt interest from private activity bonds, which fund projects that benefit the public (like airports).

Next, remove certain tax breaks, such as your deductions for property, state, and local taxes, or even the standard deduction. This will give you the alternative minimum taxable income (AMTI).

Then, subtract from the AMTI your AMT exemption amount (if eligible). For tax year 2025, the Max AMT exemption is $88,100 for individuals, $68,500 for married couples filing separately, and $137,000 for married couples filing jointly or a qualifying widow(er).

Finally, compute the amount of tax for the AMT on what's left (AMT tax rates are 26% and 28% depending on AMTI), compare that amount with what you would owe under the regular tax system, and pay the higher of the two.

Prior to the passage of the TCJA (tax years 2017 or earlier), about 3.1% of taxpayers were impacted by the AMT. However, if you made over $200,000 a year, the chances of the AMT impacting you could be anywhere from 18.4% to 69.5%¹. With those odds, many people were rightfully concerned about getting hit by the AMT.

Today, your odds of encountering the AMT are much lower, with only about 0.1% of taxpayers being impacted. Of course, those odds increase as your income increases. If you report more than $500,000 on your individual income tax return, the chance of AMT kicking in is about 2.0% to 8.3%.

The decrease in those impacted by the AMT is primarily because of two significant changes within the TCJA: an increase in the AMT exemptions and an increase in the phase-out thresholds. The chart below compares the prior AMT exemption to the current exemption under the TCJA.

Along with the increased exemption, the point at which the exemption begins to phase out has been significantly increased. As you can see the table below, the current phase-out threshold is high enough that most people will not have to worry about the AMT kicking in.

Once your income for the AMT hits the phase-out threshold, your AMT exemption begins to phase out at 25 cents for every dollar over the threshold. In the past, the phase-out level was quite low, and many households that wouldn't consider themselves to be particularly wealthy were subject to the AMT.

These are some of the most likely situations:

• Having a high household income. If your household income is over the phase-out thresholds ($1,252,700 for married filing jointly and $626,350 for everyone else), and you have a significant amount of itemized deductions, the AMT could still affect you.
• Realizing a large capital gain. If a steady increase in your income is not what triggers the AMT, then it might be from a one-time event. Long-term gains (e.g., profits from selling a home or other investments) are taxed at the same rate under both systems, but those capital gains could put you over the AMT exemption threshold. That could cause the AMT to kick in, which might mean, for example, that you can no longer benefit from a state income tax deduction.
• Exercising stock options. Normally, exercising qualified employee stock options (also called incentive stock options or ISOs) to buy stock at a discounted price isn't a taxable event until you sell the shares for a profit. The AMT, however, creates a paper profit that's taxable even though you won't receive the actual profit until you exercise the options.

If you're close to the AMT phase-out thresholds, you can use IRS Form 6251 to know more about your situation. You can also run your own projections using a tax preparation software or hire a tax professional to calculate it for you.

Depending on your income and deductions, you could find yourself affected by the AMT in one tax year but not the next. If you're close to the AMT threshold, doing a multiyear projection is good practice to see which tax years pose the most risk for you and how you might mitigate that risk. For example, you could accelerate or delay certain transactions, such as selling an asset with a large gain, to minimize triggering the AMT.

Getting hit with the AMT is unfortunate, but it's not a reason to change your life goals. The AMT is just something to be aware of during your financial planning process—it shouldn't keep you up at night.