Changes to Alternative Minimum Tax: What Taxpayers Need to Know Now
Learn how recent updates to the Alternative Minimum Tax may affect your income calculations, exemptions, and filing requirements for the upcoming tax year.
The Alternative Minimum Tax (AMT) was initially created to ensure high-income individuals and corporations paid a baseline level of tax, irrespective of deductions or credits. Recent legislative updates and inflation adjustments, however, have modified how the AMT functions, changing who might be affected and the amount they could owe.
These developments mean some taxpayers might newly face the AMT, while others could find themselves exempt. Understanding these changes is helpful for tax planning and avoiding unexpected liabilities when filing returns. Even those previously unaffected should be aware, as shifts in income thresholds and calculation methods could alter their tax situation.
Shifts in Income Thresholds
The AMT system uses specific income levels, called exemption amounts, below which the tax does not apply. These amounts function like a standard deduction within the AMT framework. To prevent inflation from pushing more taxpayers into the AMT system over time simply due to rising price levels, these exemption amounts are adjusted annually.
For the 2024 tax year, the Internal Revenue Service (IRS) has established the AMT exemption at $85,700 for single filers and heads of household.1Internal Revenue Service. IRS Provides Tax Inflation Adjustments for Tax Year 2024 The exemption is $133,300 for those married filing jointly or qualifying surviving spouses, and $66,650 for married individuals filing separately. These figures are higher than the 2023 amounts ($81,300 for single, $126,500 for joint filers) due to these inflation adjustments.
Looking forward, the IRS has also released the inflation-adjusted figures for the 2025 tax year. The exemption will increase to $88,100 for single filers and heads of household. For married couples filing jointly, it will rise to $137,000, and for married individuals filing separately, it will be $68,500.2Internal Revenue Service. Revenue Procedure 2024-40 (Inflation Adjustments for 2025) These ongoing adjustments, guided by the tax code, help maintain the intended scope of the tax, although legislative action can also modify these amounts. Having income above these levels is just the first step; it doesn’t automatically mean AMT is owed.
Calculating Adjusted Income
Determining potential AMT liability requires calculating Alternative Minimum Taxable Income (AMTI). This starts with your regular taxable income, which is then adjusted by adding back certain deductions and income items treated favorably under standard tax rules but disallowed for AMT. This recalculation ensures taxpayers benefiting significantly from specific tax advantages still pay a minimum tax. IRS Form 6251, Alternative Minimum Tax—Individuals, guides this process.3Internal Revenue Service. About Form 6251, Alternative Minimum Tax – Individuals
Significant adjustments often involve deductions allowed for regular tax but not for AMT. For example, deductions for state and local taxes (SALT) are typically added back when figuring AMTI. Interest on home equity loans might also be added back if the loan wasn’t used to buy, build, or substantially improve your home, even if deductible for regular tax. Tax-exempt interest from certain private activity bonds issued after August 7, 1986, usually must be included in AMTI.4Congressional Research Service. Private Activity Bonds: An Introduction
Other adjustments arise from timing differences. Depreciation for certain assets might need recalculation using slower methods for AMT compared to the regular tax system’s Modified Accelerated Cost Recovery System (MACRS). This difference creates an adjustment on Form 6251, though the total depreciation over the asset’s life remains the same under both systems. Taxpayers can sometimes elect AMT depreciation methods for regular tax to avoid this adjustment.
Exercising Incentive Stock Options (ISOs) commonly triggers AMT adjustments.5Internal Revenue Service. Instructions for Form 6251 (2024) While not usually taxed for regular purposes upon exercise, the difference between the stock’s fair market value and the exercise price (the “bargain element”) is generally added to income for AMT calculations. If the stock is sold in the same year it’s exercised, this adjustment usually isn’t needed as the income is recognized for regular tax then. This AMT adjustment increases the stock’s basis for AMT purposes, affecting future gain or loss calculations.
Further adjustments can stem from differing property basis calculations between regular tax and AMT due to prior depreciation or ISO adjustments. Investment interest expense deductions might also differ. Certain costs, like mining exploration or research expenditures, may require amortization over longer periods for AMT, creating another potential adjustment. Calculating AMTI involves carefully reviewing these items on Form 6251.
Exemption Phaseout Revisions
The AMT exemption amount, designed to shield some income from the tax, begins to decrease for taxpayers once their Alternative Minimum Taxable Income (AMTI) surpasses certain thresholds. This phaseout ensures the exemption primarily benefits those below specific income levels.
Like the exemption amounts, these phaseout thresholds are adjusted annually for inflation. For the 2024 tax year, the phaseout begins when AMTI exceeds $1,218,700 for married couples filing jointly or qualifying surviving spouses. For single filers, heads of household, and married individuals filing separately, the 2024 threshold is $609,350. These levels are higher than the 2023 thresholds ($1,156,300 for joint filers, $578,150 for others) per IRS guidance.
The exemption amount decreases by 25 cents for every dollar of AMTI above the threshold. This means the exemption eventually disappears entirely at higher income levels. For instance, a single filer’s 2024 exemption of $85,700 is fully phased out when AMTI reaches $952,150. For joint filers, the $133,300 exemption is eliminated at an AMTI of $1,751,900.
For the 2025 tax year, the IRS has announced further inflation-adjusted phaseout thresholds. The phaseout will start at an AMTI of $1,252,700 for joint filers and $626,350 for other individual filers. These adjustments, mandated under Internal Revenue Code Section 55, periodically revise the income levels where the exemption reduction begins.6Legal Information Institute (Cornell Law School). 26 U.S. Code § 55 – Alternative Minimum Tax Imposed Notably, the Tax Cuts and Jobs Act (TCJA) significantly raised both exemption amounts and phaseout thresholds through 2025, reducing the number of taxpayers subject to AMT. However, these higher levels are set to expire after 2025, which could subject more taxpayers to the phaseout in later years without new legislation.
Filing and Reporting Steps
Meeting Alternative Minimum Tax requirements involves knowing when and how to report calculations to the IRS, primarily using Form 6251, Alternative Minimum Tax—Individuals. Taxpayers typically determine the need to file this form based on instructions for their main tax return (Form 1040 or 1040-SR).
Certain situations may require filing Form 6251 even if no AMT is ultimately due. For example, filing is necessary if you claim:
- The qualified electric vehicle credit (Form 8834)
- The personal-use part of the alternative fuel vehicle refueling property credit (Form 8911)
- The credit for prior year minimum tax (Form 8801).7Internal Revenue Service. Topic No. 556, Alternative Minimum Tax
Filing Form 6251 is also required if you claim any general business credit on Form 3800 and meet certain conditions specified on that form.
Completing Form 6251 involves calculating your tentative minimum tax. You start with regular taxable income, make adjustments and add preference items to find your AMTI, then subtract the applicable AMT exemption (if eligible). The result is used to compute the tentative minimum tax using AMT rates (currently 26% and 28%). Part III of the form guides the application of preferential rates for certain capital gains or qualified dividends.
After calculating the tentative minimum tax, compare it to your regular tax liability (before certain credits). If the tentative minimum tax is higher, the difference is your AMT liability, reported on Schedule 2 of Form 1040 and added to your total tax. If it’s not higher, you generally owe no AMT, though Form 6251 might still need to be filed if specific conditions were met.
The tentative minimum tax calculation can also limit certain tax credits, as many general business credits cannot reduce tax liability below this amount. Paying AMT might also generate a minimum tax credit (calculated on Form 8801) usable against regular tax in future years, typically related to “deferral items.” Accurate record-keeping is essential for items treated differently under regular tax and AMT rules, such as depreciation and asset basis, to support Form 6251 figures and calculate potential future credits. Form 6251 and any supporting documents must be attached to your Form 1040 or 1040-SR and filed by the tax deadline.