Alternative Minimum Tax (AMT): Who Pays It and How to Plan

The Alternative Minimum Tax is a parallel tax system designed to ensure high-income taxpayers pay a minimum amount of federal tax regardless of deductions. If your AMT liability exceeds your regular tax, you pay the difference on top of your regular bill.

What Is the AMT?

Congress created the AMT in 1969 after discovering that 155 very high-income households paid zero federal income tax by stacking deductions. The AMT runs parallel to the regular tax system and disallows many common deductions. You calculate your tax both ways and pay whichever is higher.

Since 2018, the AMT affects far fewer taxpayers than before. The Tax Cuts and Jobs Act nearly doubled the exemption amounts and raised the phase-out thresholds significantly, removing most upper-middle-income households from AMT exposure.

2025 and 2026 AMT Exemption Amounts

The exemption is the amount of AMT income that is not subject to the AMT. It phases out at higher income levels.

The exemption phases out at $0.25 for every $1.00 of AMT income above the threshold. Once income is high enough, the exemption is fully eliminated.

AMT Rates: 26% and 28%

The AMT uses two flat rates — much simpler than the seven-bracket regular tax system:

• 26% on AMT income up to $239,100 (2025)
• 28% on AMT income above $239,100 (2025)

For comparison, qualified dividends and long-term capital gains are taxed at their preferential rates (0%, 15%, or 20%) under the AMT as well, which reduces AMT exposure for taxpayers who rely heavily on investment income.

How to Calculate Your AMT

The AMT calculation happens on IRS Form 6251 and follows these steps:

1. Start with regular taxable income. Begin with the taxable income from your Form 1040 before the qualified business income (QBI) deduction.
2. Add back AMT preference items. These include the standard deduction (if taken), state and local tax deductions, miscellaneous itemized deductions, and most depreciation differences between regular and AMT methods.
3. Arrive at Alternative Minimum Taxable Income (AMTI). This is the adjusted income figure before the exemption.
4. Subtract the AMT exemption. For 2025: $88,100 for Single filers, $137,000 for MFJ. If your AMTI exceeds the phase-out threshold, the exemption is reduced.
5. Apply the AMT rate(s). Multiply by 26% (and 28% on income above $239,100) to get your tentative minimum tax.
6. Compare to regular tax. If tentative minimum tax exceeds your regular tax, you owe the difference as AMT.

Who Is Most Likely to Owe AMT?

After the 2018 TCJA changes, the AMT primarily affects:

• Employees with Incentive Stock Options (ISOs). Exercising ISOs creates an AMT preference item equal to the spread between the exercise price and fair market value. This is the most common trigger for middle-income AMT today.
• Very high-income households whose exemption has fully phased out (AMTI above ~$980K single / ~$1.8M MFJ in 2025).
• Taxpayers with large depreciation adjustments from real estate or business equipment under accelerated depreciation schedules.
• Taxpayers with significant tax preference items such as percentage depletion on mineral rights or tax-exempt interest from certain private activity bonds.

Key Preference Items That Add Back to AMTI

These deductions are allowed under regular tax but disallowed or adjusted under the AMT:

• Standard deduction — not deductible for AMT purposes
• State and local tax (SALT) deduction — not deductible for AMT (this is why the $10K SALT cap has less impact on AMT-affected taxpayers)
• ISO spread on exercise — must be added back in the year ISOs are exercised
• Accelerated depreciation differences — the portion of depreciation exceeding the AMT-allowed straight-line method
• Certain tax-exempt interest — interest from some private activity bonds
• Percentage depletion — excess over cost depletion

AMT Credit: Recovering AMT Paid in Prior Years

If you paid AMT in a prior year due to timing differences (such as ISO exercises, not permanent preference items), you may be eligible for the AMT credit (Form 8801). This credit allows you to recover AMT previously paid in years when your regular tax exceeds your tentative minimum tax. It effectively makes the AMT a timing difference rather than a permanent extra cost for ISO-related AMT.

AMT Planning Strategies

For ISO Holders

• Spread ISO exercises over multiple years to keep the spread below the exemption threshold each year.
• Model before exercising — use Form 6251 projections to understand your AMT exposure for each exercise scenario.
• Consider early-year exercises when the company is still private and the spread is smaller.
• Disqualifying dispositions (selling ISO shares before holding periods are met) convert the gain to ordinary income, eliminating the AMT preference item but losing preferential capital gains treatment.

General AMT Planning

• Accelerate income into AMT years if you're going to owe AMT regardless — since additional income may be taxed at a lower marginal rate under AMT (26%) than regular tax (32–37%).
• Defer or forgo SALT payments in AMT years — they add back anyway and provide no actual benefit.
• Use your AMT credit proactively in low-income years when regular tax exceeds AMT.
• Consult a tax professional if you have ISOs, significant depreciation, or income in the phase-out range — AMT interactions are complex and errors are costly.

Key Takeaways

• The AMT is a parallel tax system — you calculate both and pay whichever is higher
• For 2025, the exemption is $88,100 (Single) / $137,000 (MFJ), substantially higher since 2018 TCJA
• AMT rates are 26% and 28% — simpler but higher than lower regular tax brackets
• ISO exercises are the most common AMT trigger for middle-income taxpayers today
• SALT and standard deductions are added back — they provide no AMT benefit
• Prior-year AMT from timing items is recoverable via the AMT credit (Form 8801)
• If you hold ISOs or have complex depreciation, model your AMT exposure before year-end