What Is the Alternative Minimum Tax (AMT) and Who Pays It?

The Purpose of the AMT

The Alternative Minimum Tax (AMT) is a separate federal income tax calculation that runs in parallel with the regular tax system. Congress created it in 1969 after discovering that 155 high-income households had paid zero federal income tax by stacking multiple legal deductions and preferences. The AMT ensures that taxpayers above certain income thresholds pay at least a minimum amount of tax, regardless of how many deductions they claim.

In practice, you calculate your tax liability under both the regular system and the AMT system, then pay whichever is higher. If the AMT produces a higher bill, the difference is your AMT liability. Most middle-income taxpayers are not affected — but for those who trigger it, the AMT can add thousands of dollars to their tax bill.

How AMT Is Calculated

The AMT calculation starts with your regular taxable income and then adds back AMT preference items and adjustments — specific deductions and exclusions that are allowed under regular tax rules but disallowed or limited under the AMT. The result is your Alternative Minimum Taxable Income (AMTI).

From AMTI, you subtract the AMT exemption (a large exclusion that phases out at higher income levels) to get the base on which AMT rates apply. Two flat AMT rates then apply: 26% on AMTI up to $232,600 (for 2025) and 28% on AMTI above that threshold. If the resulting AMT liability exceeds your regular tax, you pay the difference as additional AMT.

The AMT Exemption and Phase-Out

The AMT exemption is the most important shield against the AMT for most people. For 2025, the exemption is approximately $137,000 for married filing jointly and $88,100 for single filers. Taxpayers whose AMTI falls below these thresholds pay no AMT at all, which is why the AMT primarily affects higher-income households.

However, the exemption phases out at $1,232,600 (married filing jointly) and $626,350 (single) for 2025 — reducing by $0.25 for every dollar of AMTI above the threshold. This phase-out creates an effective marginal rate that is higher than 28% for taxpayers in the phase-out range, creating a sort of AMT penalty zone for very high incomes before the exemption disappears entirely.

Common AMT Triggers

Several common tax situations can trigger or increase AMT liability:

• Incentive Stock Options (ISOs): The spread between the exercise price and fair market value of ISOs is an AMT preference item. Exercising a large number of ISOs in a single year is one of the most frequent AMT triggers, particularly in tech and startup environments.
• State and local tax (SALT) deductions: SALT deductions are fully disallowed under AMT. Taxpayers in high-tax states who take large SALT deductions may find the AMT wipes out that benefit.
• Accelerated depreciation: Certain depreciation methods that produce faster write-offs than straight-line depreciation are partially added back under AMT.
• Percentage depletion: Depletion deductions for oil, gas, and mineral properties above cost basis are AMT preference items.
• Tax-exempt private activity bond interest: Interest from certain municipal bonds, while exempt from regular tax, is counted as income under AMT.

How the Tax Cuts and Jobs Act Changed the AMT

The Tax Cuts and Jobs Act of 2017 substantially raised the AMT exemption and phase-out thresholds, removing the majority of middle-class filers from AMT exposure. Before 2018, millions of upper-middle-income taxpayers — particularly in high-tax states — were regularly hit by the AMT. The post-TCJA changes reduced the number of AMT payers from approximately 5 million to fewer than 200,000 households.

These changes are scheduled to expire after 2025 unless extended by Congress. If the TCJA provisions sunset, AMT exemptions would revert to pre-2018 levels (approximately $84,500 for married filers and $54,300 for singles, not inflation-adjusted). This potential reversion is one reason tax professionals are closely watching congressional action leading into 2026.

The AMT Foreign Tax Credit

Taxpayers who pay foreign income taxes and claim the foreign tax credit under regular tax rules face an important limitation: the foreign tax credit is not fully available under the AMT. The AMT foreign tax credit can only offset up to 90% of AMT liability, meaning at least 10% of your AMT bill must be paid regardless of foreign taxes paid. This creates complex planning challenges for US citizens working abroad or holding significant foreign investments.

Strategies to Minimize AMT Exposure

For taxpayers who regularly face AMT or are at risk of triggering it, several planning strategies can help:

• Spread ISO exercises over multiple years: Rather than exercising all options in one year, staggering exercises limits the AMTI in any single year and may keep you below the AMT threshold.
• Accelerate income in high-AMT years: Counterintuitively, recognizing additional income in a year when you are already paying AMT may not increase your total tax bill if the additional income is already in the AMT base.
• Time deductions strategically: Deductions disallowed under AMT (like SALT) provide no benefit in an AMT year. Shift those deductions to years when you are in the regular tax system.
• Avoid AMT preference investments in taxable accounts: Hold private activity bonds (subject to AMT) in IRAs rather than taxable accounts where the interest would be an AMT preference item.