Quick overview

The Alternative Minimum Tax (AMT) runs alongside the regular federal income tax. You first calculate tax under the normal rules, then calculate AMT taxable income (AMTI) under AMT rules. If the AMT result is higher, the IRS requires you to pay that higher amount. This “higher of” rule is the core of how the two systems interact (see IRS guidance on AMT) (https://www.irs.gov/taxtopics/tc556).

How the two calculations differ

  • Regular tax: Uses standard tax brackets, itemized deductions or standard deduction, credits, and ordinary rules on income recognition.
  • AMT: Starts with alternative minimum taxable income (AMTI). It disallows or adds back certain preferences and deductions (for example, many state and local tax deductions, certain itemized deductions, and the tax benefit of some tax-exempt items). You then apply AMT rates to AMTI.
  • Outcome: You pay the higher of the regular tax or the AMT. The AMT computation is reported on Form 6251 (https://www.irs.gov/forms-pubs/about-form-6251).

Key AMT triggers to watch for

  • Large state and local tax (SALT) deductions or high property taxes.
  • Large miscellaneous itemized deductions (now largely suspended under TCJA for regular tax but still relevant historically).
  • Significant capital gains or large taxable events in a single year.
  • Exercise of incentive stock options (ISOs) without a same-year sale — the bargain element can be an AMT adjustment.
  • High tax-exempt private activity bond interest.

All of these can raise AMTI and push you into AMT even if your regular tax bill looks reasonable.

AMT rates and exemptions (what to know)

The AMT uses two marginal rates (26% and 28%) and allows an AMT exemption that phases out at higher income levels. Exemption amounts and phaseouts are adjusted for inflation annually, so check the IRS for current figures for the tax year you’re filing (IRS Topic No. 556 and Form 6251 instructions).

Practical example (conceptual)

Imagine a taxpayer with otherwise typical income but a large one-time capital gain and high state taxes. Under regular rules, itemized deductions reduce taxable income substantially. Under AMT rules, the SALT deduction is added back, and the large capital gain increases AMTI — the AMT calculation can exceed regular tax, so AMT becomes the required tax.

Planning strategies to reduce AMT risk

Common misconceptions

  • “AMT only hits the very wealthy.” Not always. Middle‑income taxpayers who have large SALT, exercise ISOs, or a concentrated capital gain can face AMT.
  • “Paying AMT once means you’re permanently worse off.” You may earn an AMT credit (often claimed with Form 8801) for certain timing differences that can reduce future regular tax, but the credit rules are specific — consult Form 8801 guidance and a tax advisor.

What to do if you suspect AMT applies

  1. Run a preliminary AMT calculation using Form 6251 or reliable tax software. 2. Adjust year‑end moves (deferring income, accelerating deductible items where helpful). 3. Talk to a CPA or tax planner — AMT modeling involves many moving parts.

Sources and further reading

Professional disclaimer: This article is educational and not personalized tax advice. Tax rules change and AMT exemption amounts are updated annually — consult the IRS or a qualified tax professional for advice tailored to your situation.