Who Is Subject to Alternative Minimum Tax?

The Alternative Minimum Tax (AMT) is a parallel tax system that runs alongside the regular federal income tax. Its purpose is to ensure taxpayers with high economic income pay a minimum amount of tax, regardless of deductions and credits claimed under standard rules. You must calculate your tax liability under both the regular and AMT systems and pay whichever amount is higher.

While the Tax Cuts and Jobs Act (TCJA) reduced the number of people subject to the AMT, it remains a factor for those with certain financial situations. The AMT calculation uses a separate set of rules that disallow or limit deductions allowed for regular tax purposes.

Common Factors That Trigger the AMT

Several factors can increase the likelihood of being subject to the AMT. Common triggers include:

• Having a high gross income, particularly over $500,000, which can cause the AMT exemption to phase out and expose more income to AMT tax rates.
• Exercising incentive stock options (ISOs), as the “bargain element” (the difference between the stock’s market value and your purchase price) is treated as income for AMT purposes, even though it is not for regular tax in that year.
• Claiming large deductions for state and local taxes (SALT). These deductions, which include income, sales, and property taxes, are disallowed for AMT purposes and must be added back to your income.
• Receiving substantial long-term capital gains or qualified dividends. While taxed at the same rates for both systems, this income can raise your overall income enough to trigger the phase-out of the AMT exemption.
• Earning tax-exempt interest from private activity bonds. Unlike interest from most municipal bonds, this specific type of interest must be added to your income when calculating Alternative Minimum Taxable Income (AMTI).

Information Needed for the AMT Calculation

To determine if you owe AMT, you must complete Form 6251, Alternative Minimum Tax—Individuals. The calculation begins with figures from your completed Form 1040, specifically your adjusted gross income (AGI) and regular taxable income. Having a completed regular tax return is necessary, as the process involves comparing your regular tax liability to the tentative minimum tax calculated on Form 6251.

The main preparation involves identifying specific adjustment and preference items. For incentive stock options (ISOs), you need the total bargain element, often detailed on Form 3921. For state and local taxes, you will need the total amount deducted on Schedule A. If you have investments in municipal bonds, you must identify any tax-exempt interest from private activity bonds, which is reported in Box 9 of your Form 1099-INT.

The AMT Calculation Process

The calculation of the Alternative Minimum Tax begins with determining your Alternative Minimum Taxable Income (AMTI). Starting with your regular taxable income, you will add back certain deductions, such as state and local taxes, and include income not taxed under the regular system, like the bargain element from ISOs. The result of these modifications is your AMTI.

Once you have calculated your AMTI, the next step is to subtract the AMT exemption amount. For the 2025 tax year, the exemption is $137,000 for married couples filing jointly, $88,100 for single filers, and $68,500 for those married filing separately. This exemption is subject to a phase-out for higher-income taxpayers, reducing the exemption by 25 cents for every dollar of AMTI that exceeds the 2025 threshold of $1,252,700 for joint filers and $626,350 for most other filing statuses.

After subtracting the applicable AMT exemption, you apply the AMT tax rates to the remaining income. For 2025, a 26% rate applies to the first $239,100 of income above the exemption ($119,550 for married individuals filing separately). Any income exceeding this threshold is taxed at a 28% rate. This calculation determines your Tentative Minimum Tax.

The final step is a direct comparison between your Tentative Minimum Tax and your regular tax liability. If the Tentative Minimum Tax is higher than your regular tax, the difference is the Alternative Minimum Tax you owe. This AMT amount is then reported on Schedule 2 of your Form 1040. If your regular tax is higher, you do not owe AMT.

Understanding the Minimum Tax Credit

Paying AMT can generate a Minimum Tax Credit that may reduce your regular tax liability in future years. This credit is designed to prevent double taxation on certain items over time. The credit is calculated using Form 8801, Credit for Prior Year Minimum Tax, and can only be claimed in a year when you are not liable for the AMT.

Eligibility for the credit depends on the type of adjustments that caused you to pay AMT. These are categorized as either “deferral items” or “exclusion items.” Deferral items, like income from exercising ISOs or certain depreciation adjustments, represent timing differences between the two tax systems and are the items that create the credit.

In contrast, exclusion items represent permanent differences between the two tax systems and do not generate a credit. Common exclusion items include the standard deduction and deductions for state and local taxes. Paying AMT because of these items does not result in a future credit.

The Minimum Tax Credit is nonrefundable, meaning it can only reduce your regular tax liability to zero. Any unused portion of the credit is not lost and can be carried forward indefinitely to use against regular tax in future years. Tracking the credit is important for long-term tax planning, especially after a one-time AMT event like a large ISO exercise.