Understanding Alternative Minimum Tax (AMT): A Guide for High-Income Filers

The alternative minimum tax (AMT) is a parallel tax system designed to guarantee that high-income individuals cannot reduce their tax burden excessively through deductions and credits. Operating independently from the standard tax code, AMT requires certain taxpayers to calculate their taxes under both conventional and alternative rules, then pay whichever amount is higher. This system disallows numerous common deductions—particularly state and local tax (SALT) deductions—and adds back certain income typically considered tax-exempt, resulting in a substantially higher taxable income for those subject to AMT requirements.

Who Should Be Concerned About AMT Liability?

The AMT exemption thresholds determine which taxpayers face this additional tax burden. Primarily, high-income earners with substantial deductions encounter AMT calculations, especially those with:

• Large capital gains from investments or business dispositions
• Exercised incentive stock options (ISOs)
• Tax-exempt interest from private activity bonds
• Significant itemized deductions, including mortgage interest and medical expenses

Taxpayers in high-tax jurisdictions with complex investment portfolios face elevated risk. Those claiming substantial home equity loan interest deductions, business-related expenses, or unreimbursed professional costs may inadvertently trigger AMT assessments. The AMT exemption amount varies by filing status and adjusts annually for inflation, but higher incomes cause the exemption to phase out entirely.

The AMT Calculation Process: Breaking It Down

Step 1: Calculate Alternative Minimum Taxable Income (AMTI)

AMTI begins with regular taxable income, then adjusts by adding back disallowed deductions. The critical adjustment involves removing SALT deductions and net operating losses for pass-through entities. This recalculation significantly increases the income base subject to tax.

Step 2: Apply the AMT Exemption with Phaseout Reductions

The amt exemption functions similarly to a standard deduction but disappears at higher income levels. As income surpasses a threshold specific to filing status, the exemption reduces by 25% of excess income.

2025 AMT Exemption and Phaseout Structure:

Once income reaches complete phaseout, the exemption vanishes entirely, making all AMTI taxable under AMT rules.

Step 3: Apply AMT Tax Rates to Taxable AMTI

After deducting the adjusted exemption, the remaining taxable AMTI faces AMT tax rates: 26% on the first $239,100 (or $119,550 for married filing separately), and 28% on amounts exceeding this threshold.

Step 4: Determine Final AMT Obligation

Calculate the tentative minimum tax using AMT rules. If this exceeds your regular income tax liability, the surplus becomes your AMT payment obligation.

Working Through an AMT Calculation Example

Consider an unmarried filer in 2025 with $700,000 in AMTI. The standard AMT exemption for single filers equals $88,100, but because AMTI exceeds the $626,350 phaseout threshold, the exemption reduces.

The excess amount is $73,650 ($700,000 − $626,350). Applying the 25% reduction: $73,650 × 0.25 = $18,412.50 reduction.

Adjusted exemption: $88,100 − $18,412.50 = $69,687.50

Taxable AMTI: $700,000 − $69,687.50 = $630,312.50

Tax calculation:

• First $239,100 at 26% = $62,166
• Remaining $391,212.50 at 28% = $109,511.50
• Total tentative AMT: $171,677.50

If regular tax liability is lower than $171,677.50, the difference must be paid as additional tax.

Key Takeaways

The alternative minimum tax functions as a protective mechanism ensuring high earners maintain meaningful tax obligations despite substantial deductions. The AMT exemption provides relief through its threshold structure, but taxpayers with incomes above phaseout levels face mandatory additional taxation. Understanding whether AMT applies requires reviewing your specific income, deductions, and investment activities under both tax calculation methods. Those with capital gains, stock option exercises, or complex tax profiles should evaluate their exposure regularly.