Alternative Minimum Tax (AMT)

How It Works

The Alternative Minimum Tax is a separate tax calculation that runs alongside the regular income tax. You pay whichever amount is higher. The AMT was created in 1969 after Congress discovered that 155 high-income taxpayers had paid zero federal income tax by using legal deductions and exclusions. The AMT disallows or limits several deductions that are available under the regular tax system, including state and local tax deductions, certain miscellaneous deductions, and the bargain element on incentive stock option exercises. The 2025 AMT exemption amounts are $88,100 for single filers and $137,000 for married filing jointly, with a phaseout that begins at $609,350 for single filers. The AMT has two rates: 26% on the first $239,100 of AMT income above the exemption and 28% on income above that. The Tax Cuts and Jobs Act of 2017 significantly raised the AMT exemption and phaseout thresholds, dramatically reducing the number of taxpayers subject to AMT — from about 5 million to roughly 200,000. Before the reform, middle-income taxpayers in high-tax states were frequently caught by the AMT due to large state tax deductions. Today, AMT primarily affects taxpayers who exercise incentive stock options, have large amounts of tax-exempt interest from private activity bonds, or claim significant accelerated depreciation. If you exercise ISOs, understanding AMT is critical to avoiding a surprise tax bill.