The alternative minimum tax (AMT) is a tax levied on higher earners that ensures they pay a certain amount of their income in taxes, regardless of the number of credits or deductions they receive. Even if your ordinary income tax is lower, you’ll still have to pay the AMT.
If you’re an investor, understanding the AMT could help you manage your tax liability more effectively. Let’s break it down so you can understand who qualifies for the AMT, how it works, and ways you might save on taxes.
The Alternative Minimum Tax (AMT) is a federal tax system ensuring high-income earners pay a minimum level of tax, even after claiming deductions or credits. It recalculates taxable income by adding back certain disallowed deductions, such as state and local taxes, to create an Alternative Minimum Taxable Income (AMTI). Taxpayers pay the higher of their AMT or regular tax liability.
The AMT was introduced in 1969 to address concerns that some wealthy taxpayers were paying little to no tax. However, it lacked inflation adjustments, causing bracket creep where middle-class earners unintentionally fell under its scope. Congress addressed this in 2012 by tying AMT exemption limits to inflation.
If you’re a high-income earner or claim significant deductions, the AMT could apply to you. Understanding its impact is essential for smarter tax planning.
The Alternative Minimum Tax (AMT) ensures that high-income taxpayers pay a minimum level of tax, even with substantial deductions or credits. For 2025, the AMT exemption and phase-out thresholds are adjusted for inflation, following the IRS guidelines:
The AMT applies at two rates, 26% and 28%, with the higher rate kicking in for income exceeding $239,100 for most taxpayers ($119,550 for married couples filing separately). The exemption is reduced by $0.25 for every dollar earned above the phase-out threshold.
These updates reflect the IRS’s annual inflation adjustments. For complete details and the latest figures, consult the IRS’s official resources or trusted tax-related organizations like Tax Foundation.
According to estimates by the Tax Policy Center, only about 200,000 taxpayers in the U.S. currently qualify for the AMT. This number is a dramatic reduction from pre-2017 levels, reflecting the impact of these tax reforms.
The alternative minimum tax (AMT) ensures high-income taxpayers pay a minimum tax rate. To determine if AMT applies to you, follow these steps:
Calculate your regular taxable income as you would normally, using standard or itemized deductions.
Adjust your regular taxable income by adding back certain deductions and credits not allowed under AMT rules (e.g., state and local tax deductions).
Find your AMT exemption amount for your filing status (e.g., single, married filing jointly) and subtract it from your AMTI. The exemption phases out for higher-income taxpayers.
The AMT has two rates:
26% on the first portion of your AMTI (up to $239,100 in 2025 for most taxpayers).
28% on income above this threshold.
Calculate the tax owed under AMT rules and compare it to your regular tax liability. If the AMT calculation results in a higher amount, you must pay the AMT instead of your regular tax.
Avoiding the Alternative Minimum Tax (AMT) involves a combination of strategies to lower your taxable income and awareness of factors that may increase your AMT liability. Let’s break them down.
You can reduce your AGI and lower your AMTI by:
For individuals working or living abroad, applying the foreign tax credit can reduce your regular tax liability, which may, in turn, lower your AMTI and AMT liability.
Keep an eye on long-term capital gains, especially from investments like stocks or crypto. Managing the timing of these gains can help reduce your overall AMTI.
If you receive ISOs from your employer and choose to exercise them, they may contribute to your AMTI. While ISOs are not subject to ordinary income tax, the bargain element (the difference between the stocks market price and the exercise price) is included in the AMT calculation. Proper timing and planning are crucial to managing this risk.
Reinvesting dividends instead of keeping them as liquid income may reduce your AMT exposure. Tools like Public’s automatic dividend reinvestment feature can help you manage this effectively.
The Alternative Minimum Tax (AMT) is an important consideration for high-income taxpayers, as it ensures that they pay a minimum level of tax, even with deductions and credits. Understanding the AMT, how it is calculated, and the potential strategies for avoiding it can help you make more informed tax decisions. By leveraging tax software, staying mindful of tax breaks, and using strategies like tax-loss harvesting or monitoring capital gains, you can manage your exposure to the AMT.
For those in complex tax situations or with significant investment income, consulting with a tax professional is recommended to ensure accurate reporting and compliance. With annual adjustments for inflation, the AMT rules and thresholds will continue to evolve, so staying updated on these changes is essential for smart tax planning in 2025 and beyond.
