Alternative Minimum Tax (AMT): What It Is and How It Works

The alternative minimum tax (AMT) is a separate tax system that makes sure people with high incomes still pay some tax, even if they have a lot of deductions. It removes some common deductions, like state and local taxes, and uses different rules to figure out what you owe. It mostly affects people with high deductions or complex tax situations. A financial advisor can help you see if the AMT applies to you and recommend strategies to manage your tax burden.

What Is Alternative Minimum Tax (AMT)?

The AMT is a separate tax system created to prevent high-income earners from using too many tax breaks to lower their tax bill too much. It runs alongside the regular tax system and requires some taxpayers to figure their taxes both ways—under regular rules and AMT rules—and then pay the higher amount.

Unlike the standard tax code, AMT disallows many common deductions adds back some income that’s usually tax-free, including state and local tax (SALT) deductions and some business-related expenses, leading to a higher taxable income base for those subject to it.

Who Pays AMT?

The AMT generally applies to high-income earners who benefit from large deductions, capital gains, or certain types of investment income. Although the exemption is now adjusted for inflation, some individuals—such as those with incentive stock options or tax-exempt interest from private activity bonds—may still be subject to it.

To see if you might owe AMT, review your income and deductions for common triggers. These include high state and local tax deductions, large capital gains, or exercising incentive stock options. People in high-tax states or with complex investments are often more likely to be affected.

Claiming many itemized deductions, like mortgage interest on home equity loans, large medical expenses, or unreimbursed business costs, can lower your regular taxable income. This may lead to a higher AMT calculation and increase your chances of owing under the AMT system.

How to Calculate AMT

Calculating the AMT involves several steps to determine whether a taxpayer owes additional tax beyond their regular liability. The process involves adjusting taxable income, applying an exemption and then calculating tax at a different rate structure.

Below is a step-by-step breakdown of how to determine AMT liability.

1. Determine Alternative Minimum Taxable Income (AMTI)

AMTI starts with the taxpayer’s regular taxable income and is adjusted by adding back certain deductions and tax preference items that are not allowed under AMT rules. Common adjustments include removing deductions for state and local taxes (SALT), and net operating loss deductions for pass-through business.

2. Apply the AMT Exemption

The AMT exemption reduces the portion of AMTI subject to tax (sort of like the standard deduction), but it phases out at higher income levels. As income increases beyond a set threshold, the exemption is gradually reduced by 25% of the excess income over the phaseout threshold. The exemption and phaseout thresholds for 2025 are as follows:

2025 Alternative Minimum Tax (AMT) Exemption Thresholds

If AMTI reaches the complete phaseout level, the exemption is eliminated entirely, meaning all AMTI is taxable under AMT rules.

3. Calculate Taxable AMTI

Once the adjusted exemption is subtracted from AMTI, the remaining taxable AMTI is subject to AMT tax rates. The first $239,100 of taxable AMTI is taxed at 26% ($119,550 for those married filing separately), while any amount above this threshold is taxed at 28%.

4. Compare Tentative Minimum Tax to Regular Tax

The final step is determining whether AMT applies. The tentative minimum tax is the amount calculated using the AMT system. If this amount is higher than the taxpayer’s regular income tax liability, the difference must be paid as AMT.

An Example of How AMT Works

Suppose a single filer in 2025 has an AMTI of $700,000. The AMT exemption for unmarried individuals is $88,100, but because their income exceeds the phaseout threshold of $626,350, the exemption is reduced.

The phaseout works by reducing the exemption by 25% of the excess income over the threshold. In this case, the excess AMTI is $73,650 ($700,000 – $626,350), resulting in an exemption reduction of $18,412.50 (25% of $73,650). After applying the reduction, the final exemption amount is $69,687.50 ($88,100 – $18,412.50). Subtracting this exemption from AMTI leaves $630,312.50 in taxable AMTI.

The next step is applying the AMT tax rates. The first $239,100 of taxable AMTI is taxed at 26%, which results in $62,166. The remaining $391,212.50 is taxed at 28%, adding $109,511.50 in tax. Adding these amounts together, the total tentative AMT comes to $171,677.50.

Finally, this amount is compared to the taxpayer’s regular tax liability. If their regular tax is lower than $171,677.50, they must pay the difference as AMT.

Bottom Line

AMT serves as a safeguard against excessive tax reductions by recalculating income using a different set of rules. It primarily affects taxpayers with high deductions, incentive stock options or substantial capital gains, requiring them to assess their tax liability under both the regular and AMT systems. While exemption thresholds help reduce its impact for many filers, those with incomes above the phaseout range may find themselves subject to additional tax.

Tax Planning Tips

• If you’re looking for ways to lower your tax liability, a financial advisor who specializes in tax planning can help optimize your finances. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.

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