How the Alternative Minimum Tax (AMT) changes the value of itemized deductions

The AMT is a separate tax system designed to make sure taxpayers who use particular deductions, credits or timing strategies still pay at least a minimum amount of federal tax. It does this by changing which items you can deduct and by adding specific “preference” items back into income when calculating Alternative Minimum Taxable Income (AMTI).

Under the AMT, several itemized deductions that reduce your regular tax may be limited or disallowed altogether. Because AMT rules differ from the regular-tax rules, a taxpayer who benefits from specific deductions under the regular system may see little or no benefit once AMT is applied.

(For the IRS’s official guidance and the form used for the individual AMT calculation, see IRS Form 6251 and Topic 556.) (IRS, Form 6251; IRS Topic 556)

Which itemized deductions are most affected by AMT?

  • State and local taxes (SALT): The SALT deduction you claim on Schedule A for regular tax purposes is generally not allowed for AMT purposes. That means high state income, sales and property tax deductions can be added back when computing AMTI.

  • Miscellaneous itemized deductions: Historically, many miscellaneous deductions were disallowed under AMT. Since the Tax Cuts and Jobs Act (TCJA) suspended miscellaneous itemized deductions for regular tax through 2025, the interaction has changed — but any deduction that is a preference item under AMT rules will still be added back. (See IRS guidance for current treatment.)

  • Tax-exempt interest from private activity bonds: Interest from certain private activity municipal bonds is tax-exempt for regular tax but may be an AMT preference item and added back to AMTI.

  • Incentive stock options (ISOs): If you exercise ISOs and hold the shares past the tax year, the bargain element (difference between market value and exercise price) can trigger AMT income in the year of exercise, even if you don’t sell the shares. This is a common AMT trigger for higher-compensation employees.

  • Depreciation and business tax preference items: Differences in depreciation methods between regular tax and AMT calculations can create AMT adjustments for business owners or those with large investment properties.

Note: Mortgage interest used to have some AMT differences in older law, but post-TCJA changes and the yearly adjustments make it important to check current IRS instructions before assuming a deduction’s AMT treatment. Always review the latest Form 6251 instructions.

How AMT is calculated (plain-language steps)

  1. Start with your regular taxable income (the figure after itemized deductions or the standard deduction).
  2. Add back AMT preference items and disallowed deductions to get Alternative Minimum Taxable Income (AMTI).
  3. Subtract the AMT exemption amount (the exemption is subject to phaseout for higher incomes and changes yearly).
  4. Apply the AMT rates to the result to compute tentative minimum tax (AMT liability).
  5. Compare tentative minimum tax to regular tax. If tentative minimum tax is higher, the difference is the AMT you owe.

This calculation is implemented in IRS Form 6251 for individuals. Use Form 6251 or tax software to see whether AMT applies to your return. (IRS, Form 6251)

Practical examples (simplified) and common scenarios

Example 1 — High SALT and property taxes:
A homeowner in a high-tax state who itemizes may claim large state and local tax deductions under regular tax rules. For AMT, most SALT is not deductible, so that portion of the deduction is effectively reversed when computing AMTI, increasing the chance of AMT liability.

Example 2 — Exercise of ISOs:
An employee exercises incentive stock options resulting in a large bargain element. Even if the employee holds the shares and pays no regular tax on the transaction that year, the bargain element may be included in AMTI, potentially producing an AMT bill.

Example 3 — Large tax-exempt interest:
Investors holding private activity municipal bonds may see that tax-exempt interest added back as an AMT preference item, raising AMTI despite the regular-tax exemption.

In my practice, I’ve seen taxpayers surprised by AMT because their regular-tax return showed a big deduction that simply didn’t count for AMT. Running Form 6251 early in the planning year prevents surprises.

How to identify whether you might be subject to AMT

  • Run Form 6251 alongside your regular return (your tax software should do this automatically).
  • Look for large SALT, significant private-activity bond interest, ISO exercises, large capital gains, or unusual depreciation differences.
  • If your income is concentrated in a single year (for example, a bonus, large capital gain, or exercise of options), test alternate timing strategies to see if moving income or deductions across years changes AMT exposure.

Tax planning strategies to reduce AMT exposure

  1. Reduce AMTI where possible:
  • Contribute to pre-tax retirement accounts (401(k), traditional IRA) to lower taxable income and AMTI. Contributions that reduce taxable income generally reduce AMTI as well.
  1. Time deductions and income:
  • If you expect to be near AMT thresholds, consider timing itemizable expenses and income across tax years. For homeowners who pay state and local property taxes, evaluate when to pay — though the SALT cap and AMT rules limit how much timing helps.
  1. Manage incentive stock options:
  • Consider the timing of ISO exercises. Spreading exercises across years or planning for a disqualifying disposition in the same year can change AMT consequences. Discuss ISO exercise strategies with a tax professional.
  1. Use the AMT credit when eligible:
  • If you paid AMT in a prior year because of deferral items (for example, due to depreciation or AMT preference that later reverses), you may be eligible for a minimum tax credit (MTC) to reduce regular tax in later years. That credit is claimed on Form 8801. Learn more about the AMT credit and Form 8801 on our site.
  1. Consider tax-favored charitable strategies:
  • Bunching charitable gifts into a single year or using donor-advised funds can change the composition of itemized deductions and the timing of deductions. See our guide on Optimizing Charitable Deductions Under AMT for techniques that often reduce AMT risk.
  1. Work with your preparer before year-end:
  • If you’re near AMT triggers, a CPA or experienced tax planner can run scenarios and file the appropriate forms to minimize surprises.

Misconceptions and common mistakes

  • “Only the very wealthy pay AMT”: False. Middle-income taxpayers with specific deductions or a single high-income event (e.g., ISO exercise, large capital gain, or concentrated income year) can trigger AMT.

  • “You can’t recover AMT once you pay it”: Not always true. If AMT was paid because timing or deferral items created temporary differences, you may be able to claim an AMT credit in later years with Form 8801.

  • “All itemized deductions vanish under AMT”: Not accurate. Some deductions are still allowed (such as qualifying medical expenses subject to their regular limits, depending on year and rules), but many common deductions are added back or disallowed.

How to proceed this tax year (checklist)

  • Run a draft return including Form 6251 to see if you hit AMT.
  • Discuss the timing of income (bonuses, capital gains) and exercises of stock options with your advisor.
  • Evaluate whether retirement plan contributions will reduce AMTI materially.
  • If you paid AMT in a previous year, check eligibility for an AMT credit (Form 8801).

Useful internal resources:

Authoritative sources and further reading:

Professional note: In my tax-planning work I routinely run AMT projections when clients have large non-wage income, significant itemized deductions, or are exercising equity compensation. Early modeling often saves clients from unexpected bills and helps decide whether to accelerate or defer tax events.

Disclaimer: This article is educational and does not substitute for personalized tax advice. Tax law changes frequently; for detailed, situation-specific guidance, consult a certified public accountant (CPA) or tax attorney. The IRS site and referenced forms contain the authoritative rules and current year thresholds.