Alternative Minimum Tax (AMT)

The alternative minimum tax (AMT) is a second way of calculating US federal income tax that runs alongside the ordinary rules. It adds back many deductions and exclusions, applies its own exemption and rates, and if the result is higher than the regular tax bill, the taxpayer pays the difference. Its purpose is to stop people and companies with large incomes from using so many tax breaks that they owe little or nothing.

Today there are two separate versions. The individual AMT is reported on IRS Form 6251 and mostly affects households with high incomes or particular items such as incentive stock options. The corporate alternative minimum tax (CAMT), added by the Inflation Reduction Act of 2022, is a 15% minimum tax on the book profits of corporations with more than $1 billion of average annual financial statement income. Neither should be confused with the OECD's 15% global minimum tax for multinationals, which is a separate international regime.

Imagine a restaurant that lets regular customers use coupons, loyalty points and special discounts. Most diners end up paying a fair amount, but a few stack so many discounts that they eat almost for free. The owner adds a rule: work out your bill the normal way, then work it out again with most coupons switched off and a simpler price list. You pay whichever is higher.

That is the AMT. Most people never meet it because their normal bill is already the higher one; it bites only when income is large or comes with unusual breaks.

The idea dates to 1969, after the Treasury told Congress that 155 households with incomes above $200,000 had paid no federal income tax in 1967. Congress responded with an "add-on" minimum tax. The Revenue Act of 1978 created a true alternative calculation, and the Tax Reform Act of 1986 overhauled it into the structure still recognisable today, with a broad base of adjustments and "preference items" and a separate corporate AMT.

Because the exemption was not indexed for inflation, the AMT crept down the income scale until the American Taxpayer Relief Act of 2012 indexed it. The Tax Cuts and Jobs Act of 2017 (TCJA) raised the exemption and the income level at which it phases out for 2018–2025, which sharply cut the number of AMT payers, and it repealed the old corporate AMT. The One Big Beautiful Bill Act, signed on 4 July 2025, made the higher exemption permanent but, from 2026, lowered the phase-out starting points to $500,000 (single) and $1,000,000 (married filing jointly), indexed thereafter, and doubled the phase-out rate from 25% to 50%.

The calculation starts from regular taxable income and adds back items the AMT does not allow. The best known are:

• State and local taxes. The deduction for state and local income and property taxes is not allowed for AMT purposes.
• Incentive stock options. The "bargain element" when an employee exercises options on common stock and holds the shares is an AMT adjustment, a common trap for technology employees.
• Private activity bond interest. Interest on certain municipal bonds that finance private projects is a preference item, even though it is otherwise tax-exempt income; some bond funds disclose how much of their income falls into this group.

The result is alternative minimum taxable income (AMTI). An exemption is subtracted, rates of 26% and 28% are applied, and the answer is the tentative minimum tax. Long-term capital gains and qualified dividends keep their lower rates under the AMT. The amount owed is:

• $\text{TMT}$ is the tentative minimum tax from the AMT calculation.
• $\text{RT}$ is the regular income tax before most credits.

For 2026 the exemption is $90,100 for single filers and $140,200 for married couples filing jointly. It shrinks by 50 cents for every dollar of AMTI above the phase-out threshold:

Here $E_0$ is the full exemption and $T$ the threshold. A single filer with AMTI of $600,000 loses $0.5 \times 100{,}000 = 50{,}000$, leaving an exemption of $40,100. If that person's tentative minimum tax were $160,000 and regular tax $150,000, the AMT would be $10,000, for a total of $160,000. AMT caused by timing items such as stock options can create a credit usable in later years.

The CAMT applies for tax years beginning after 31 December 2022. A corporation is covered if its average annual adjusted financial statement income (AFSI) over three consecutive prior years exceeds $1 billion; for some foreign-parented groups the US part must exceed $100 million while the whole group passes the $1 billion test. S corporations, regulated investment companies and real estate investment trusts are excluded. AFSI starts from the profit in the company's audited financial statements and annual report, with statutory adjustments, so it taxes "book" income rather than the taxable income in the return. The IRS issued proposed regulations in September 2024.

Critics say the AMT makes tax filing more complex by forcing a second calculation, and that it often catches people it was not aimed at, such as employees exercising stock options or residents of high-tax states. Supporters see it as a backstop that limits aggressive use of preferences, which are legal and sit on the avoidance side of the line drawn in tax avoidance vs tax evasion. Economists also debate whether taxing book profit encourages companies to manage reported earnings.

Investors meet the AMT mainly through timing. Selling assets with a large capital gain raises AMTI and can trigger the phase-out, and buying private activity bonds can reduce the after-tax benefit of a municipal yield. Contributions to a traditional individual retirement account (IRA) reduce income for both calculations. Because the AMT is part of US direct tax law, it applies according to a person's tax residency; an investment adviser or tax preparer usually models both systems before large sales.

• IRS: Topic no. 556, Alternative minimum tax
• IRS: About Form 6251, Alternative Minimum Tax – Individuals
• IRS: Inflation Reduction Act of 2022