What Triggers the Alternative Minimum Tax (AMT)?

By SmartAsset Team

The alternative minimum tax (AMT) is designed to ensure that certain taxpayers who benefit from various deductions and tax preferences still pay a minimum level of tax. Several factors can trigger AMT liability, including high income, large deductions and financial activities that create differences between regular taxable income and the income calculated under the AMT system. Common triggers include bringing in substantial earnings, taking significant itemized deductions, exercising incentive stock options and using accelerated depreciation methods.

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What Is AMT and How Does it Work?

The alternative minimum tax was created in 1969 to prevent high-income taxpayers from using loopholes and deductions to avoid paying taxes. Some taxpayers must compute their tax liability using two methods – one following the standard tax rules and another under the alternative AMT framework.

Unlike the regular tax system, which allows various deductions and exemptions, the AMT has its own set of rules and exemptions. This can lead to unexpected tax bills for those who are unaware of the implications.

Certain deductions and exemptions that are allowed under the regular tax system are added back to the taxpayer’s income, resulting in the alternative minimum taxable income (AMTI). This AMTI is then taxed at flat rates. If the AMT liability is greater than the regular tax liability, the taxpayer must pay the higher amount.

What Triggers AMT Tax?

AMT applies when certain income levels, deductions or financial activities create a lower tax liability under the regular tax system. Here’s a look at common triggers of AMT:

• High income: Taxpayers with substantial income from salaries, investments or other sources are more likely to be subject to the AMT.
• Large deductions: Claiming significant deductions for state and local taxes (SALT), medical expenses or home mortgage interest can increase the likelihood of triggering the AMT.
• Incentive stock options (ISOs): Exercising ISOs can result in a large spread between the grant price and the market price, which is considered income for AMT purposes.
• Depreciation of business assets: Accelerated depreciation methods can lead to differences between regular taxable income and AMTI.
• Net operating loss deductions: These deductions are limited under the AMT system.
• Foreign tax credits: The AMT may limit the use of foreign tax credits, increasing taxable income.
• Exempt-interest bonds: Interest from specified private activity bonds that are exempt from the regular income tax are included in AMTI.

Calculating Your AMT Tax Bill

Calculating your AMT tax bill involves several steps. First, you need to determine your AMTI by adding back certain deductions and preferences to your regular taxable income. Common adjustments include state and local taxes (SALT), mortgage interest on home equity loans and medical expenses.

Once you have your AMTI, subtract the AMT exemption amount, which varies based on your filing status and is adjusted annually for inflation. For example, in 2025, the exemption amount is $88,100 for single filers and $137,000 for married couples filing jointly. The remaining amount is your taxable income for AMT purposes.

Here are the exemption amounts and phaseout thresholds for 2025:

In 2025, the exemption starts to decline when a taxpayer’s AMTI exceeds $1,252,700 for joint filers and $626,350 for single filers. For every dollar of AMTI beyond these thresholds, the exemption is reduced by 25% of the excess income.

Next, you apply the AMT tax rates to your AMTI. The AMT has two tax rates: 26% and 28%. For 2025, the 26% rate applies to income up to $239,100 ($119,550 if married filing separately), while the 28% rate applies to income above this threshold.

Finally, compare your AMT tax liability to your regular tax liability and pay whichever is higher.

How Do I Avoid AMT?

While it may not be possible to completely avoid the AMT, there are strategies to minimize its impact. Here are some common approaches:

• Manage deductions: Be mindful of deductions that can trigger the AMT, such as state and local taxes, mortgage interest and miscellaneous itemized deductions. Consider timing these deductions to minimize their impact.
• Exercise ISOs strategically: If you have ISOs, carefully plan when to exercise them to avoid a large AMT liability. Spreading exercises over multiple years can help.
• Defer income: If possible, defer income to future years when you may not be subject to the AMT. This can be particularly useful for self-employed individuals or those with flexible income sources.
• Use tax credits: Some tax credits, like the foreign tax credit, can help offset your AMT liability.
• Consult a tax professional: Given the complexity of the AMT, working with a tax professional can help you develop a personalized strategy to minimize your exposure.

Bottom Line

The alternative minimum tax, or AMT, is a distinct tax system designed to ensure that high-income individuals pay a minimum level of taxes, even if they qualify for numerous deductions under the regular tax system. The AMT operates by adding back certain tax preferences and deductions to a taxpayer’s income, resulting in an alternative minimum taxable income. If the AMT liability exceeds the regular tax liability, the taxpayer must pay the higher amount.

Tax Strategy Tips

• Placing different asset types in accounts based on their tax treatment – a strategy known as asset location – can reduce tax exposure. Tax-efficient investments, like index funds and municipal bonds, are best held in taxable accounts, while tax-inefficient investments, like bonds and REITs, benefit from tax-deferred or tax-free accounts. Additionally, prioritizing long-term capital gains (taxed at lower rates) over short-term gains can further optimize tax efficiency.
• A financial advisor with tax planning expertise can help you build a tax strategy tailored to your situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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