Alternative Minimum Tax (AMT)

Posted on December 30, 2025

ALTERNATIVE MINIMUM TAX (AMT)

The AMT is a separate, parallel federal income tax system designed to ensure that certain high-income taxpayers pay at least a minimum amount of tax, preventing them from using specific exclusions, deductions, and credits to significantly reduce or eliminate their tax liability.

Taxpayers who may be subject to the AMT must calculate their tax liability twice, meaning, once it should be calculated under the regular income tax rules and then also under the AMT rules. The taxpayer is then expected to pay the higher of the two amounts.

How the AMT works ?

The core principle of the AMT is to broaden the amount of income subject to tax by disallowing or limiting many of the tax breaks available under the regular tax system:

AMT calculation process involves the following steps:

• Calculate regular taxable income.
• Calculate Alternative Minimum Taxable income (AMTI): Start with regular taxable income and add back certain disallowed deductions and "tax preference items" (for example, state and local taxes, certain interest from private-activity bonds, and the "bargain element" from incentive stock options).
• Subtract the AMT exemption amount: An inflation-adjusted exemption is provided, but it phases out at higher income levels.
• Apply AMT tax rates: The remaining is generally taxed at two rates: 26% and 28%.
• Compare and Pay: The taxpayer pays whichever amount is greater- their regular tax liability or their tentative minimum tax( the result of the AMT calculation).
• Taxpayers use IRS Form 6251 to figure out their AMT liability.

Key Factors and Triggers

There are certain situations which can be said to trigger the AMT:

• High household income-The AMT primarily impacts those with high economic income.
• Large itemized deductions: Deductions for state, local, and property taxes (SALT) are disallowed under the AMT rules.
• Exercising Incentive Stock Options (ISOs): The difference between the price paid for stock options and their fair market value at the time of exercise is considered income for AMT purposes, even if the stock is not immediately sold.
• Certain types of investments: Interest from certain private activity municipal bonds is tax-exempt for regular tax purposes but is included as income for AMT calculations.

2025 AMT Key Figures

For the 2025 tax year, the Alternative Minimum Tax (AMT) exemption is $88,100 for single filers and $137,000 for married couples filing jointly. These amounts are adjusted annually for inflation and have associated income thresholds and tax rates.

Taxpayers potentially subject to the AMT must calculate their tax liability under both the regular income tax system and the AMT rules and pay the higher amount. The AMT uses two tax rates - 26% and 28%.

• Exemption Phaseout: The exemption amount is reduced by 25 cents for every dollar your Alternative Minimum Taxable Income (AMTI) exceeds the phaseout threshold.
• Calculating the AMT: Taxpayers can use IRS Form 6251 to determine if they owe the AMT. The calculation generally involves adding back certain deductions and exclusions to your regular taxable income to arrive at AMTI.

Planning Ahead: 2026 Changes:

A new law passed in July 2025, the "One Big Beautiful Bill Act", made the higher AMT exemption amounts permanent, but will lower the income thresholds at which the exemptions phase out starting in 2026. The phaseout rate will also increase from 25% to 50%, which implies that more high-income taxpayers may be subject to the AMT in 2026 and beyond.