Alternative Minimum Tax
A parallel federal income tax system under IRC Sections 55-59 designed to ensure that high-income taxpayers who benefit from significant deductions and exclusions still pay a minimum level of income tax.
The Alternative Minimum Tax (AMT) operates as a shadow tax system alongside the regular income tax. The IRS requires taxpayers to calculate their tax liability under both systems and pay whichever amount is higher. The AMT was originally introduced in 1969 after Congress discovered that 155 high-income households had paid zero federal income tax by utilizing numerous legal deductions and exclusions. The Tax Cuts and Jobs Act of 2017 substantially narrowed its reach, though it remains relevant for certain high-income taxpayers in 2025.
To determine AMT liability, taxpayers start with regular taxable income and add back 'preference items' and 'adjustments' — items that reduce regular tax but are disallowed under the AMT. Common adjustments include the deduction for incentive stock option (ISO) exercises (the spread on ISOs is an AMT preference item even though it generates no regular taxable income), certain accelerated depreciation deductions, and the standard deduction (which is not allowed under AMT). The result is Alternative Minimum Taxable Income (AMTI).
From AMTI, taxpayers subtract the AMT exemption, which for 2025 is $137,000 for married filing jointly and $88,100 for single filers. These exemptions phase out at a rate of 25 cents per dollar of AMTI above $1,252,700 (joint) and $626,350 (single). After applying the exemption, the remaining AMTI is taxed at 26% on the first $239,100 (2025) and 28% on amounts above that threshold for most taxpayers.
For investors, the AMT is most commonly triggered by the exercise of incentive stock options (ISOs). The difference between the exercise price and the market value of ISO shares on the exercise date is an AMT preference item, potentially generating a large AMT liability even if the shares are not immediately sold. Private equity and hedge fund investors may also encounter AMT issues related to tax preference items from pass-through entities.
Long-term capital gains and qualified dividends are taxed at the same preferential rates under both the regular tax and the AMT, so they do not create a direct AMT preference. However, because they increase AMTI, they can reduce the AMT exemption through the phase-out, indirectly increasing AMT exposure. Form 6251 is used to calculate AMT, and any resulting AMT paid may generate an AMT credit that can offset regular taxes in future years.