How to Calculate the Alternative Minimum Tax (AMT)

The alternative minimum tax (AMT) calculation determines whether a taxpayer must pay an additional amount beyond their regular income tax liability. To calculate AMT, taxable income is adjusted by adding back certain deductions to determine alternative minimum taxable income (AMTI). An exemption is then applied, though it phases out at higher income levels. After subtracting the exemption, the remaining AMTI is taxed. If the calculated AMT exceeds the regular tax liability, the taxpayer must pay the difference.

A financial advisor with tax expertise can help you plan for AMT and other tax liabilities. Connect with an advisor today.

Understanding Alternative Minimum Tax

AMT is a separate tax system designed to limit the use of deductions and credits that could significantly lower a taxpayer’s federal income tax liability. It applies primarily to high-income individuals who claim substantial deductions, exercise incentive stock options or earn income from tax-preferred investments.

Common AMT triggers include high state and local tax (SALT) deductions, large capital gains, incentive stock options and certain business expenses. IRS Form 6251 helps determine AMT liability by guiding taxpayers through necessary income adjustments and tax calculations.

AMT applies only if the calculated AMT liability exceeds the amount owed under the standard tax system. To offset some of its impact, AMT includes an exemption amount, which phases out for taxpayers with higher incomes.

While adjustments for inflation have reduced its reach, AMT still affects those with complex financial situations, particularly individuals with large capital gains or deductions relative to their earnings.

How to Calculate AMT Tax

The AMT calculation follows a process separate from regular income tax, adjusting taxable income and applying different rates. Here’s how to determine AMT liability.

1. Adjust Taxable Income for AMT Rules

Begin with your regular taxable income, and then add back deductions not allowed under AMT. These include SALT deductions, certain business expenses and miscellaneous itemized deductions. Income from incentive stock options (ISOs) and certain municipal bond interest may also need to be included.

2. Subtract the AMT Exemption

The 2025 AMT exemption is $88,100 for single filers and $137,000 for joint filers. However, if alternative minimum taxable income exceeds $626,350 for single filers or $1,252,700 for joint filers, the exemption is gradually reduced by 25% of the excess amount.

3. Apply AMT Tax Rates

For all filers, with the exception of those married filing separately, AMTI remaining after the exemption is taxed at 26% on the first $239,100 and 28% on any income above that. The threshold for those married filing separately is $119,500.

For example, a married couple filing jointly with $1.4 million in AMTI exceeds the $1,252,700 threshold by $147,300. The exemption is reduced by 25% of this excess ($36,825), leaving a final exemption of $110,475 ($147,300 – $36,825). The taxable AMTI is then $1,289,525.

The first $239,100 is taxed at 26% ($62,166), while the remaining $1,060,725 is taxed at 28% ($297,003), bringing the total AMT liability to $359,169.

4. Compare With Regular Tax Liability

Lastly, the tentative AMT is compared to the taxpayer’s regular income tax. If it is higher, the difference must be paid as AMT. For example, if the couple’s regular income tax liability would have been $300,000 thanks to various deductions, they would still have to pay the higher AMT amount.

Planning for AMT

Taxpayers who anticipate being subject to AMT can take steps to reduce their liability or prepare for the added cost. One approach is to time income and deductions strategically. For example, they might defer capital gains or accelerate deductible expenses in years when AMT is less likely to apply.

Since SALT deductions are disallowed under AMT, high-income filers may benefit from managing property tax payments or considering tax-efficient investments. Using AMT-friendly investments, such as tax-exempt municipal bonds that are not subject to AMT rules, can help reduce AMTI.

For those with ISOs, exercising options strategically or selling shares within the same tax year can prevent unexpected AMT liabilities. Consulting a tax professional before making major financial decisions can help identify tax-efficient strategies and ensure AMT liability is factored into overall financial planning.

Bottom Line

AMT affects certain taxpayers by adjusting income calculations and limiting deductions, leading to a separate tax liability if the AMT exceeds regular tax obligations. While inflation adjustments have reduced its reach, individuals with high capital gains, large deductions or incentive stock options may still be subject to it.

Understanding how to calculate AMT allows for better financial planning, whether through tax-efficient investments, strategic timing of income or managing deductions. Reviewing potential AMT exposure before year-end can help taxpayers anticipate any additional liability and explore strategies to minimize its impact where possible.

Tax Planning Tips

• Starting at age 73, retirees must begin taking required minimum distributions (RMDs) from tax-deferred accounts like traditional IRAs and 401(k)s. These distributions increase taxable income and can push individuals into higher tax brackets. Strategies such as Roth conversions before RMD age or qualified charitable distributions (QCDs), which allow tax-free donations to charities directly from an IRA, can help reduce taxable income and manage RMD-related tax burdens effectively.
• A financial advisor who offers tax planning services can be a valuable resource if you’re looking for ways to reduce your tax liability. 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.

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