AMT Calculator

Understanding the Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that high-income taxpayers pay at least a minimum amount of federal income tax, regardless of deductions, credits, or exemptions they claim. Originally created in 1969 to prevent wealthy individuals from using deductions to avoid paying taxes entirely, the AMT has evolved into a complex calculation that can affect middle and upper-middle-income taxpayers as well.

How the AMT Works

The AMT requires taxpayers to calculate their tax liability twice: once under the regular tax system and once under the AMT system. You must pay whichever amount is higher. The AMT calculation starts with your regular taxable income, then adds back certain deductions and preference items that are allowed under the regular tax system but disallowed for AMT purposes.

The result is called Alternative Minimum Taxable Income (AMTI). From this figure, you subtract an AMT exemption amount (which varies by filing status and phases out at higher income levels), then apply AMT tax rates of 26% and 28% to calculate your tentative minimum tax. If this amount exceeds your regular tax liability, you owe the difference as AMT.

Common AMT Triggers

1. Incentive Stock Options (ISOs)

One of the most significant AMT triggers for employees in the technology sector and other industries that offer equity compensation is the exercise of Incentive Stock Options (ISOs). When you exercise ISOs, the difference between the fair market value of the stock and the exercise price (the "bargain element") is not taxed for regular income tax purposes at the time of exercise. However, this spread is treated as an AMT preference item and must be added back to your income when calculating AMTI.

For example, if you exercise ISOs with an exercise price of $10 per share when the fair market value is $60 per share, the $50 per share spread is a preference item for AMT purposes. If you exercise 1,000 shares, you would add $50,000 to your AMTI, potentially triggering a significant AMT liability even though you haven't sold the stock or received any cash.

2. State and Local Tax (SALT) Deductions

The Tax Cuts and Jobs Act of 2017 capped the state and local tax (SALT) deduction at $10,000 for regular tax purposes. However, for AMT purposes, state and local income taxes, sales taxes, and property taxes are completely disallowed. This means that any SALT deductions you claim on your regular tax return must be added back when calculating AMTI.

This particularly affects taxpayers in high-tax states like California, New York, New Jersey, and Connecticut, where state income tax rates can exceed 10%. If you paid $20,000 in state and local taxes, you could deduct $10,000 for regular tax purposes, but the full $20,000 would be added back for AMT, increasing your likelihood of owing AMT.

3. Miscellaneous Itemized Deductions

Prior to the Tax Cuts and Jobs Act, miscellaneous itemized deductions subject to the 2% floor (such as unreimbursed employee expenses, investment expenses, and tax preparation fees) were disallowed for AMT purposes and had to be added back to AMTI. While most of these deductions were eliminated for regular tax purposes from 2018-2025, they may become AMT triggers again if they are reinstated after 2025.

4. Other Common Preference Items

Additional items that can trigger AMT include:

• Private activity bond interest: Interest from certain municipal bonds that are tax-free for regular tax purposes may be taxable for AMT.
• Accelerated depreciation: Differences between regular and AMT depreciation methods can create preference items for businesses and rental property owners.
• Passive activity losses: Passive losses that reduce regular taxable income may need to be recalculated for AMT purposes.
• Net operating loss deduction: The NOL deduction for AMT is calculated differently than for regular tax.

AMT Exemption and Phase-Out

The AMT system provides an exemption amount that reduces your AMTI before calculating the tentative minimum tax. For 2025, the exemption amounts are:

• Single and Head of Household: $85,700
• Married Filing Jointly: $133,300
• Married Filing Separately: $66,650

However, these exemptions phase out at higher income levels. The exemption is reduced by 25 cents for every dollar of AMTI above certain thresholds ($609,350 for single filers and $1,218,700 for married filing jointly in 2025). This phase-out effectively creates a higher marginal tax rate for taxpayers in the phase-out range.

AMT Tax Rates

Once you've calculated your AMT base (AMTI minus the exemption), you apply the AMT tax rates. The AMT has only two tax brackets: 26% on the first $220,700 of AMT base (for both single and married filing jointly filers in 2025), and 28% on amounts above that threshold. These rates are lower than the top regular tax rates, but because the AMT base is often much larger than regular taxable income due to added-back preference items, the total tax owed can still be substantial.

Strategic Planning to Minimize AMT

1. ISO Exercise Timing

If you have ISOs, careful timing of exercises can help minimize AMT. Consider exercising ISOs over multiple years to stay below AMT thresholds, rather than exercising all at once. You can also use AMT projections to determine the optimal number of options to exercise each year. Some taxpayers exercise ISOs in January to maximize the holding period before a potential sale while deferring the AMT payment until the following April. Additionally, if you exercise ISOs and the stock price subsequently declines, selling the stock in the same calendar year as the exercise can eliminate the AMT preference item.

2. Timing of Income and Deductions

In years when you expect to be subject to AMT, accelerating income may be less costly than in non-AMT years, since the AMT rates (26% and 28%) are lower than the top regular tax rates. Conversely, deferring deductions that are disallowed for AMT (like state income tax payments) may be beneficial, as those deductions provide no benefit in an AMT year. You might also consider bunching deductions that are allowed for both regular tax and AMT (like charitable contributions) into non-AMT years where they provide maximum benefit.

3. Tax Credit Management

Many tax credits can offset both regular tax and AMT, but some credits (like the foreign tax credit) have different limitations under AMT. Understanding these rules can help you maximize credit utilization. Additionally, any AMT paid creates an AMT credit that can be carried forward indefinitely and used to reduce regular tax in future years when you're not subject to AMT.

4. Investment Strategy

If you're subject to AMT, avoid investing in private activity bonds, as the tax-free interest from these bonds becomes taxable for AMT purposes. Instead, focus on investments that provide favorable tax treatment under both regular tax and AMT, such as corporate bonds, qualified dividends, and long-term capital gains.

The AMT Credit (Minimum Tax Credit)

When you pay AMT, you may generate an AMT credit that can be used in future years. This credit is created when AMT is paid due to "deferral items" (like ISO exercises or depreciation differences) rather than "exclusion items" (like SALT deductions). The AMT credit can be carried forward indefinitely and used to reduce regular tax in years when you're not subject to AMT. This credit ensures that AMT often represents a timing difference rather than a permanent additional tax, particularly for those who pay AMT due to ISO exercises.

Who Should Calculate AMT?

While the IRS Form 6251 is required for anyone who owes AMT, you should calculate your potential AMT liability if you have any of the following situations: exercised ISOs during the year, live in a high-tax state with significant SALT deductions, have substantial miscellaneous itemized deductions (in years when they're allowed), own a business with accelerated depreciation, or have high income with significant itemized deductions. Even if you don't owe AMT in a particular year, understanding your proximity to AMT can help with tax planning decisions.

AMT Reform and Future Changes

The Tax Cuts and Jobs Act of 2017 significantly increased the AMT exemption amounts and phase-out thresholds, reducing the number of taxpayers subject to AMT from about 5 million to around 200,000. However, many of these provisions are scheduled to sunset after 2025, which could cause the AMT to affect many more taxpayers again starting in 2026. Additionally, the SALT deduction cap is also scheduled to expire after 2025, which could change AMT dynamics for taxpayers in high-tax states.

Staying informed about potential tax law changes and working with a qualified tax professional can help you navigate the complex AMT rules and minimize your tax liability both now and in the future.

Conclusion

The Alternative Minimum Tax is a complex parallel tax system that can significantly impact your tax liability, particularly if you exercise incentive stock options, live in a high-tax state, or have other AMT preference items. Understanding how AMT works, what triggers it, and how to plan around it is essential for minimizing your tax burden. Use this AMT calculator to estimate your potential exposure and consult with a tax professional to develop a comprehensive tax strategy that accounts for AMT considerations.