Alternative Minimum Tax

Glossary Definition: Alternative Minimum Tax (300 words)

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that high-income taxpayers and those with certain deductions and tax preferences pay at least a minimum amount of federal income tax. Created to prevent wealthy individuals from using excessive deductions and credits to avoid paying taxes, the AMT requires taxpayers to calculate their tax liability twice—once under the regular tax system and once under the AMT system—and pay whichever amount is higher.

The AMT system adds back certain deductions and applies different rules to calculate an alternative taxable income. Common adjustments and preferences that trigger AMT include state and local tax deductions (the $10,000 SALT cap doesn’t apply under AMT calculations), certain miscellaneous itemized deductions, private activity municipal bond interest, incentive stock option exercises, accelerated depreciation on certain property, and passive activity losses. By adding these items back, the AMT recalculates your income on a broader base with fewer deductions allowed.

For 2024, AMT exemption amounts are $85,700 for single filers and $133,300 for married couples filing jointly. These exemptions phase out at higher income levels, beginning at $609,350 for single filers and $1,218,700 for married filing jointly. After calculating alternative minimum taxable income and subtracting applicable exemptions, AMT is calculated at two rates: 26% on amounts up to $232,600 ($116,300 for married filing separately) and 28% on amounts exceeding these thresholds.

You must complete Form 6251 (Alternative Minimum Tax—Individuals) to determine if you owe AMT. The form guides you through adding back preferences, calculating exemptions, and determining your AMT liability. If you pay AMT in one year due to timing differences (like incentive stock options), you may be able to claim an AMT credit in future years when you’re not subject to AMT.

While AMT originally targeted the wealthy, it increasingly affected middle-income taxpayers until the Tax Cuts and Jobs Act significantly raised exemption amounts and eliminated several common AMT triggers, reducing the number of taxpayers subject to this parallel tax system.