Alternative minimum tax explained

The alternative minimum tax (AMT) was created in 1969 to close tax loopholes for those in higher tax brackets. Since it mainly affects the wealthiest individuals and couples, the AMT may never come into play for most U.S. taxpayers.

The 2017 Tax Cuts and Jobs Act (TCJA) increased the AMT exemption amounts and exemption phaseout thresholds, lowering the number of taxpayers who were subject to the alternative minimum tax. The 2025 legislative package known as the “One Big Beautiful Bill Act” (or OBBBA) makes the higher exemption amounts permanent but modifies the exemption phaseout thresholds.

Here’s what you need to know about the alternative minimum tax and whether your tax filing could be affected now or in the future. 

What is the alternative minimum tax?

The alternative minimum tax is another way to calculate income taxes. It requires certain taxpayers to determine their liability twice: once using regular income tax rules and once using AMT rules. They then must pay whichever amount is higher.

Here's how the alternative minimum tax works:

• You calculate your regular taxable income.
• You complete AMT Form 6251 which applies any adjustments or preferences to determine alternative minimum taxable income (AMTI).
• After the AMT exemption is subtracted from AMTI, the AMT tax rates are applied to determine tentative minimum tax (26% or 28%, depending on the AMTI).
• The taxpayer is subject to AMT if the tentative minimum tax exceeds the regular tax liability calculated on regular taxable income.

Who pays the alternative minimum tax?

Not everyone is subject to the alternative minimum tax, but there are a few common triggers. They include: 

• You have an income above the AMT exemption. If your income is above the threshold and you have a substantial number of itemized deductions, you may be subject to AMT. 
• You exercise incentive stock options (i.e., ISO’s) to buy stock at a discounted strike price. This is not a taxable event for regular tax purposes but is for AMT purposes. If the discount is substantial, a significant adjustment item would exist and increase your potential to be subject to the AMT.
• You have a high ratio of long-term capital gains to ordinary income. This trigger would only affect people with incomes of more than $1 million combined. A potential scenario would be a business owner who sold a business that had appreciated steeply over a period of 25 to 30 years. While qualified dividends and long-term capital gains are still taxed at preferential rates of 15 to 20%, large amounts of such income may cause the phase out of the alternative minimum tax exemption and indirectly cause the AMT to apply to other income.
• You earn income from specific sources. Incentive stock options, intangible drilling costs, tax-exempt interest from certain private activity bonds (PAB) and depletion and accelerated depreciation on certain leased personal or real property²may all prompt the alternative minimum tax.

Consider talking to a financial professional if you’re unsure about your status.

Why was the alternative minimum tax created?

A simplified version of the alternative minimum tax, called the add-on minimum tax, was created in 1969 to ensure the country’s wealthiest citizens paid their fair share of taxes. The IRS had discovered that 155 taxpayers with income of more than $200,000 had not paid income tax in 1966 because they used deductions unavailable to the average citizen.¹As a result, Congress passed the add-on minimum tax.

This add-on tax applied to certain income items that the regular income tax system either taxed lightly or overlooked. The largest of these “preferences” was the portion of capital gains excluded from the regular income tax.

Revisions to the alternative minimum tax throughout the years increased the number of affected taxpayers from 155 in 1969 to nearly 4.5 million by 2015. Noting that the number of affected people had grown so significantly, changes to the AMT as we know it today were included in the TCJA and made permanent or modified in the OBBBA. These changes reduce the number of taxpayers who must pay the alternative minimum tax.

Alternative minimum tax and the OBBBA

The TCJA significantly narrowed the scope of the alternative minimum tax, which the OBBBA has made permanent, with some modifications:

• Higher alternative minimum tax exemptions. For the 2025 tax year, it’s $88,100 for individuals and $137,000 for married couples filing jointly. The AMT will continue to be adjusted annually for inflation.
• Lower income levels for exemption phaseout. Phaseout for the 2025 tax year starts at $626,350 for individuals and $1,252,700 for married couples filing jointly. However, beginning in 2026, the exemption phaseout threshold will be reduced to 2018 levels: $500,000 for individuals and $1,000,000 for married couples filing jointly. These amounts will be indexed annually for inflation.
• Accelerated phaseout threshold. The OBBBA increases the exemption phaseout once the threshold is reached. Currently 25% of the dollar amount above the threshold, the new phaseout rate will be 50%. 

Your tax and financial professionals can help you determine how the OBBBA could affect your alternative minimum tax status and, if so, how you can best plan for these changes.

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