Alternative Minimum Tax (AMT): Who Pays & How It Works

Determine if you are subject to AMT, understand the calculation process, and learn strategies to minimize this parallel tax system impact.

The Alternative Minimum Tax (AMT) is a parallel tax system that ensures high-income taxpayers pay at least a minimum amount of tax, even if they have significant deductions and credits under the regular tax system. Originally enacted in 1969 after Congress learned that 155 high-income taxpayers had paid zero federal income tax, the AMT has evolved significantly over the decades.

The Tax Cuts and Jobs Act of 2017 dramatically reduced the number of taxpayers subject to AMT by increasing the AMT exemption amounts and phaseout thresholds. For 2025, the exemption is $88,100 for single filers and $137,000 for married filing jointly. These higher exemptions mean that most middle-income taxpayers no longer need to worry about AMT, though it still affects high-income individuals, particularly those exercising incentive stock options or with large state and local tax deductions.

Under AMT rules, you calculate your tax liability twice: once under the regular tax system and once under the AMT system. If your AMT calculation produces a higher tax than your regular tax, you pay the difference as AMT in addition to your regular tax. The AMT disallows or limits many deductions that are available under the regular system.

How It Works

The AMT calculation starts with your regular taxable income and then adds back certain tax preference items and adjustments. Common AMT adjustments include state and local tax deductions (fully disallowed), miscellaneous itemized deductions, and the difference between fair market value and exercise price on exercised incentive stock options (ISOs). The result is your Alternative Minimum Taxable Income (AMTI).

From AMTI, you subtract the AMT exemption amount. For 2025, the exemption is $88,100 for single filers and $137,000 for married filing jointly. However, the exemption phases out at 25 cents per dollar once AMTI exceeds $609,350 (single) or $1,218,700 (MFJ). This means the exemption is completely eliminated for very high-income taxpayers. The remaining amount is taxed at AMT rates of 26% on the first $239,100 (2025) and 28% on amounts above that threshold.

If the resulting AMT is higher than your regular tax, you owe the difference. This amount is reported on Form 6251 and added to your regular tax on Form 1040. If you pay AMT due to timing differences such as ISO exercises, you may be eligible for an AMT credit in future years when those items reverse, which can be claimed on Form 8801.

Current Rates

Bracket / Category	Rate	Applies To
AMT Exemption (Single)	$88,100	Subtracted from AMTI before applying AMT rates (2025)
AMT Exemption (MFJ)	$137,000	Subtracted from AMTI before applying AMT rates (2025)
AMT Rate (lower tier)	26%	AMTI minus exemption, up to $239,100 (2025)
AMT Rate (upper tier)	28%	AMTI minus exemption, over $239,100 (2025)
Exemption Phaseout (Single)	Begins at $609,350	Exemption reduced by 25% of AMTI over threshold
Exemption Phaseout (MFJ)	Begins at $1,218,700	Exemption reduced by 25% of AMTI over threshold

Key Forms

Form 6251

Calculate Alternative Minimum Tax for individuals

Form 8801

Credit for prior year minimum tax (AMT credit carryforward)

Schedule D (AMT)

AMT calculation for capital gains and losses

Form 1040, Schedule 2, Line 1

Report AMT amount on your income tax return

Deductions & Credits

AMT Credit Carryforward

If you paid AMT due to timing differences (like ISO exercises), you may claim a credit in future years when your regular tax exceeds AMT, using Form 8801.

AMT Exemption

A significant exclusion ($88,100 single / $137,000 MFJ for 2025) that shields a portion of your AMTI from AMT rates.

AMT Foreign Tax Credit

Foreign taxes paid can be credited against AMT liability, calculated separately under AMT rules.

Capital Gains Preferential Rates Under AMT

Long-term capital gains and qualified dividends retain their preferential rates (0%/15%/20%) even under the AMT calculation.

Filing Tips

Run an AMT projection before exercising incentive stock options (ISOs) to understand the potential tax impact and plan accordingly.
Consider spreading ISO exercises across multiple tax years to stay below AMT thresholds in any single year.
If you live in a high-tax state, be aware that state and local tax deductions are fully disallowed under AMT.
Use Form 8801 to recover AMT paid in prior years through the minimum tax credit when your regular tax exceeds AMT.
Work with a tax professional if you have complex AMT triggers like ISOs, private activity bonds, or large itemized deductions.
Review AMT exposure annually, as the exemption amounts and phaseout thresholds are adjusted for inflation each year.

Frequently Asked Questions

Who is most likely to owe AMT?

After the 2017 tax reform, AMT primarily affects high-income taxpayers, particularly those who exercise incentive stock options, have large state and local tax deductions, or earn significant income from private activity bonds. The increased exemption amounts eliminated AMT for most middle-income taxpayers.

How do incentive stock options trigger AMT?

When you exercise ISOs, the difference between the fair market value and the exercise price (the bargain element) is not taxed under the regular tax system but is added to income under AMT. A large ISO exercise can create a significant AMT liability even if you do not sell the shares. This is a timing difference that may generate an AMT credit for future years.

Can I get back AMT paid in previous years?

Yes, if your AMT was caused by timing differences (deferral items like ISOs), you can claim an AMT credit in future years when your regular tax exceeds your tentative minimum tax. This credit is calculated on Form 8801 and can be carried forward indefinitely until fully used.

Does AMT affect my capital gains tax rate?

Long-term capital gains and qualified dividends are taxed at the same preferential rates (0%, 15%, or 20%) under both the regular tax and AMT systems. However, the inclusion of capital gains in your AMTI can affect the AMT exemption phaseout and push other income into AMT.

Has the AMT exemption changed recently?

The Tax Cuts and Jobs Act of 2017 nearly doubled the AMT exemption and significantly raised the phaseout thresholds, indexed annually for inflation. For 2025, exemptions are $88,100 (single) and $137,000 (MFJ). These provisions are set to expire after 2025 unless extended by Congress.

Related Tax Guides

Federal Income Tax Capital Gains Tax Self-Employment Tax Estate & Gift Tax

Find the best software for filing alternative minimum tax

Compare tax software that handles alternative minimum tax for you.

Compare Tax Software