Quick overview

The AMT is a second tax system that runs alongside regular federal income tax. Filers must complete the AMT calculation (using IRS Form 6251) when certain deductions or income items create a gap between regular taxable income and AMT income. The result: some families who look tax-efficient under regular rules still owe more tax under AMT. (See the IRS overview: https://www.irs.gov/individuals/alternative-minimum-tax.)

Who is most likely to be affected?

  • Families with significant state and local tax or property tax deductions.
  • Households realizing large capital gains in a single year.
  • Taxpayers exercising incentive stock options (ISOs) without a corresponding sale in the same year.
  • Owners of pass-through businesses or taxpayers with unusual “preference items” that AMT treats differently.

In my practice I often see two surprise scenarios: a high-income couple who realize concentrated stock sales late in the year, and an employee who exercises many ISOs in the same tax year. Both can trigger AMT even when regular-tax liability looked reasonable.

How the AMT is calculated (high level)

  • Start with regular taxable income and then add back or disallow AMT adjustments and preference items to arrive at Alternative Minimum Taxable Income (AMTI).
  • Subtract the AMT exemption (amounts and phaseouts are adjusted annually) to get the AMT base.
  • Apply the two AMT rates (26% and 28%) to the base; the taxpayer pays whichever is higher — regular tax or AMT. For current exemption amounts and phaseouts, consult the IRS AMT page linked above.

Key forms: Form 6251 (Individual AMT) and, if applicable, Form 8801 (Credit for Prior Year Minimum Tax) — more on Form 8801 here: https://finhelp.io/glossary/form-8801-credit-for-prior-year-minimum-tax-mentioned-earlier-but-relevant-under-amt-categories/.

Common AMT triggers to watch

  • Large itemized deductions for state and local taxes (SALT) and property taxes — many of these are added back for AMT.
  • Big, one-time capital gains (stock sales, business sales).
  • Incentive stock option exercises (bargain element becomes an AMT preference).
  • Tax-exempt interest from certain private-activity municipal bonds (may be an AMT preference).

Practical planning strategies

  1. Model AMT annually: Run both regular and AMT calculations before year-end. Small timing differences can prevent a surprise AMT bill. (See our AMT modeling guide for 2025: https://finhelp.io/glossary/how-the-alternative-minimum-tax-amt-works-in-2025/.)
  2. Time income and deductions: Defer or accelerate capital gains, bonus pay, or large deductible items when you can control timing. This is most effective when your projected AMT exposure hovers near the tipping point.
  3. Manage ISO exercises: If you hold ISOs, consider a staged exercise plan or simultaneous disposition (exercise-and-sell) to avoid creating a large AMT preference amount in one year.
  4. Use retirement accounts: Maxing tax-deferred retirement contributions reduces ordinary income that feeds the AMT calculation.
  5. Review municipal bonds: Avoid or limit private-activity muni bonds that generate AMT preference income.
  6. Coordinate with state tax timing: Because SALT deductions interplay with AMT differently than regular tax, prepaying state tax isn’t always beneficial from an AMT perspective.
  7. Work with a CPA or tax advisor: Complex cases often need a multi-year projection and software that calculates Form 6251 precisely.

I regularly recommend running a ‘what-if’ AMT scenario when clients expect a higher-income year (sale of a business, concentrated stock sale, or a large ISO exercise).

Example (illustrative)

A family has strong itemized deductions under regular tax (large state taxes and mortgage interest) and then sells a portion of stock for a big capital gain late in the year. Even though their regular-tax bill looked moderate during the year, the capital gain increases AMTI and — after adding back the deductions AMT disallows — the AMT calculation can produce a higher tax than the regular system. That higher amount becomes what they owe.

Mistakes to avoid

  • Assuming the regular-tax calculation is the final tax bill.
  • Exercising a large number of ISOs in one year without modeling AMT.
  • Treating SALT prepayments as automatically beneficial—AMT adds back many state tax deductions.

Useful internal resources

Authoritative sources and next steps

This entry is educational and general in nature. It is not personalized tax advice. For specific planning related to AMT, consult a qualified CPA or tax advisor who can model your multi-year tax picture and file the correct forms.