Alternative Minimum Tax (AMT): Definition, Who Pays - NerdWallet (2024)

What is alternative minimum tax?

Alternative minimum tax (AMT) is a tax system that runs parallel to the standard tax system but has different tax rates. AMT payers, who generally have relatively high incomes, essentially calculate their income tax twice — under regular tax rules and under AMT rules — and then pay the higher amount owed.

AMT calculations limit certain breaks for some taxpayers so that their tax bill is higher.

How does AMT tax work?

Incomes above the annual AMT exemption amounts typically trigger the alternative minimum tax, and calculating AMT is different from calculating your tax under regular IRS rules.

Certain types of income and tax deductions that you may exclude or deduct when figuring your normal taxes may need to be added back into your taxable income under AMT rules. For example, AMT calculations require you to include income from incentive stock options that were exercised and any refunds you received for state and local income taxes.

Alternative minimum tax rates 2023

Taxpayers who had incomes that exceeded the AMT exemption of $81,300 (single), $126,500 (married filing jointly) and $63,250 (married filing separately) in 2023 may be subject to the alternative minimum tax when they file their 2024 tax return. AMT tax rates are 26% or 28%.

2023 AMT exclusions and phase-outs

Alternative minimum tax rates 2024

The alternative minimum tax exclusion and phase-outs are adjusted for inflation each year. For the 2024 tax year (taxes filed in 2025), the exemption amounts rise to $85,700 for single filers, $133,300 for those married filing jointly, and $66,650 for those married filing separately.

2024 AMT exclusions and phase-outs

How to calculate alternative minimum tax

This is generally how the AMT calculation works:

1. Calculate your taxable income, but with fewer tax exclusions and tax deductions, as dictated by the AMT rules (IRS Form 6251 has the details on which tax breaks get eliminated in the AMT calculations.)

2. Once you have that AMT version of your taxable income, subtract the AMT exemption amount.

3. Multiply what’s left by the appropriate AMT tax rates. The AMT has two tax rates: 26% and 28%. (Compare these to the seven federal income tax brackets, ranging from 10% to 37%.) Which rate you pay depends on how high your AMT taxable income is.

4. Subtract the AMT foreign tax credit, if you qualify for it. What’s left is your income tax under the AMT rules.

5. If your income tax under the AMT rules is higher than your income tax under the regular rules, you pay the higher amount. This basically determines who has to pay alternative minimum tax.

What tax breaks do you lose under the AMT?

Taxpayers typically look for deductions, credits and other ways to reduce their taxable income. Under the AMT, you may not be able to take as many of these breaks.

Do I have to pay alternative minimum tax?

There isn’t much you can do to avoid paying AMT if you find out you have to pay it when filing your return. But figuring out whether you are vulnerable to the AMT and what triggers it can help you plan ahead. Lowering your adjusted gross income by maxing out contributions to a 401(k), IRA or health savings account can help, for example, as can keeping an eye on the size of your long-term capital gains.

If you suspect that you might owe AMT, consult a tax expert, such as a CPA, to help you with the additional paperwork and reduce or avoid the tax.

If this is giving you a headache ...

Here’s some welcome news: Most good tax software will do both sets of calculations automatically. As you enter your information, the program will run the numbers in the background according to both the regular tax system (using Form 1040) and AMT rules (using Form 6251).