What Are the AMT Rates and How Are They Calculated?

The Alternative Minimum Tax (AMT) is a parallel tax system that operates alongside the regular federal income tax. Its purpose is to ensure that individuals and corporations with high economic income, who might otherwise use various deductions and exclusions to lower their tax bill, pay at least a minimum amount of tax. Taxpayers who may be subject to the AMT must calculate their tax liability under both the regular tax rules and the AMT rules, and then pay whichever amount is higher.

The modern AMT structure was shaped by the Tax Cuts and Jobs Act of 2017 (TCJA), which increased the income levels at which the tax applies, reducing the number of taxpayers subject to it. However, these changes are scheduled to expire after 2025, which could cause the AMT to affect a much larger number of taxpayers in subsequent years. The calculation is performed on IRS Form 6251, Alternative Minimum Tax.

AMT Exemption Amounts and Phase-Outs

The tax code provides an AMT exemption, which is a specific amount of income that is shielded from the alternative minimum tax calculation. For the 2025 tax year, the exemption amount for single filers is $88,100. For married couples filing a joint return, the exemption is $137,000, and for those who are married but file separately, the amount is $68,500.

This exemption is not available to all taxpayers, as it is subject to a phase-out based on income level. For the 2025 tax year, the phase-out begins when income reaches $626,350 for single and married-filing-separately filers and $1,252,700 for married couples filing jointly.

Once a taxpayer’s income surpasses these thresholds, the exemption amount is reduced. The reduction is calculated at 25 cents for every dollar of income earned above the phase-out threshold.

Calculating Alternative Minimum Taxable Income

The foundation for the AMT calculation is a figure known as Alternative Minimum Taxable Income (AMTI). To determine AMTI, a taxpayer starts with their regular taxable income and then modifies it by adding back certain deductions and including income not taxed under the regular system. The goal is to reverse the effect of tax benefits permissible under regular tax law.

A significant adjustment for many taxpayers is the add-back of state and local tax (SALT) deductions. While taxpayers who itemize can deduct payments for state and local income, sales, and property taxes on their regular tax return (up to a $10,000 limit), these deductions are not allowed for AMT purposes. Any SALT deduction claimed must be added back to income when calculating AMTI, which is a common reason taxpayers become subject to the AMT.

Another item that requires adjustment involves incentive stock options (ISOs). When an employee exercises ISOs, the difference between the fair market value of the stock at the time of exercise and the price paid for the stock (the “bargain element”) is not considered income for regular tax purposes. For AMT calculations, this bargain element must be included in AMTI for the year the options are exercised, which can result in a substantial increase in income for AMT purposes.

Tax-exempt interest from certain private activity bonds is another preference item. While interest from most municipal bonds is exempt from regular federal income tax, interest earned on private activity bonds is taxable under the AMT. These bonds are issued by a state or municipality to finance projects for a private, non-governmental entity.

Applying the AMT Rates to Determine Tax Liability

Once Alternative Minimum Taxable Income (AMTI) has been determined, the next step is to calculate the tentative minimum tax. This process begins by subtracting the applicable AMT exemption amount from the AMTI. The resulting figure is the income base upon which the AMT rates are applied.

The AMT employs a two-tiered tax rate structure. For the 2025 tax year, the first $239,100 of AMTI (after the exemption) is taxed at a rate of 26%. Any amount of AMTI exceeding this $239,100 threshold is taxed at the higher rate of 28%. For married individuals who file separate returns, the 28% rate applies to AMTI in excess of $119,550.

After applying these rates, the result is the tentative minimum tax. The taxpayer compares this tentative minimum tax to their regular tax liability. If the tentative minimum tax is greater, the difference between the two amounts is the Alternative Minimum Tax owed.

The Minimum Tax Credit

Paying the Alternative Minimum Tax in one year can lead to a tax benefit in subsequent years through the Minimum Tax Credit (MTC). This credit is designed to prevent double taxation on certain income items that are treated differently for regular tax and AMT purposes over time, allowing taxpayers to recover a portion of the AMT paid.

The credit is generated by AMT that arises from “deferral” items. These are adjustments and preferences that cause a timing difference in when income is recognized or deductions are taken between the two tax systems. A prime example is the exercise of incentive stock options (ISOs), where the bargain element is included in AMTI in one year but is not taxed for regular purposes until the stock is sold.

In contrast, “exclusion” items do not generate a credit. These are items that are permanently disallowed as deductions under the AMT, such as the deduction for state and local taxes. Taxpayers use IRS Form 8801, Credit for Prior Year Minimum Tax, to calculate the credit, which can be carried forward indefinitely but can only reduce a future year’s regular tax down to the level of the tentative minimum tax for that year.