What Is the Alternative Minimum Tax?
The Alternative Minimum Tax (AMT) is a parallel federal income tax calculation that runs alongside the regular income tax system. It was created in 1969 after Congress discovered that 155 high-income taxpayers paid zero federal income tax through heavy use of tax preferences and deductions.
The AMT ensures that high earners pay at least a minimum amount of tax, regardless of how many deductions and preferences they claim.
How AMT Works
You calculate your taxes twice — once under the regular tax system and once under AMT rules — and pay whichever is higher.
AMT Calculation:
- Start with regular taxable income
- Add back AMT “preference items” and “adjustments”
- Subtract the AMT exemption amount
- Apply the AMT rates: 26% on the first $239,100 / 28% above that (2025)
2025 AMT Exemptions
| Filing Status | Exemption | Phase-Out Begins |
|---|---|---|
| Single | $88,100 | $626,350 |
| Married Filing Jointly | $137,000 | $1,252,700 |
| Married Filing Separately | $68,500 | $626,350 |
Common AMT “Add-Backs”
- State and local tax (SALT) deduction — entirely disallowed under AMT
- Standard deduction — not allowed under AMT
- Incentive Stock Options (ISOs) — spread at exercise is an AMT preference item
- Accelerated depreciation — must use straight-line under AMT
Who Is Subject to AMT?
After the Tax Cuts and Jobs Act (2017) dramatically increased exemptions, far fewer people are affected. You’re most at risk if you:
- Exercise Incentive Stock Options (ISOs) when the stock price is high
- Have very high SALT taxes (California, New York, New Jersey)
- Have significant passive income adjustments
Strategies to Reduce AMT Exposure
- Time ISO exercises carefully — exercise when stock price is low or in a low-income year
- Spread deductions over multiple years
- Accelerate income into AMT years when you’ll pay it anyway
AMT rules are complex. Consult a CPA or tax attorney if you’re subject to ISO exercises or other common AMT triggers.