Alternative Minimum Tax (AMT)
Definition
A parallel tax system that ensures high-income taxpayers pay a minimum amount of tax, even if deductions and credits would otherwise reduce their regular tax significantly.
The Alternative Minimum Tax is a separate tax calculation that runs alongside the regular income tax. If your AMT calculation produces a higher tax than your regular tax, you pay the difference as additional tax. The AMT was designed to prevent wealthy taxpayers from using deductions to avoid paying any income tax.
The AMT calculation starts with your regular taxable income, then adds back certain deductions and preferences — including state and local tax deductions, certain interest deductions, and incentive stock option (ISO) exercises. It then applies its own exemption amount and tax rates (26% and 28%) to determine the AMT liability.
The most common AMT trigger for regular investors is the exercise of incentive stock options. When you exercise ISOs, the difference between the exercise price and fair market value (the "bargain element") is not taxed for regular income tax but is included in AMT income. Large ISO exercises can create substantial AMT liability.
The AMT exemption amounts are adjusted annually for inflation. For 2025, the exemption is $88,100 for single filers and $137,000 for married filing jointly. The exemption phases out at higher income levels, which can create a complex interaction between regular tax and AMT.
If you pay AMT in one year, you may receive an AMT credit in future years that offsets regular tax. This credit mechanism prevents the AMT from creating permanent double taxation on timing differences like ISO exercises.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
Can investment gains trigger AMT?
Regular capital gains don't typically trigger AMT by themselves since both systems tax them similarly. However, exercising incentive stock options, large state tax deductions, and certain private activity bond interest can push you into AMT territory.
How do I know if I owe AMT?
Tax software calculates AMT automatically on Form 6251. Common indicators include high state and local taxes, exercised incentive stock options, or income between $200,000 and $500,000 where the AMT exemption begins to phase out.