Does the alternative minimum tax apply to you
The Alternative Minimum Tax (AMT) ensures that people in higher tax brackets pay minimum tax even though they are eligible for many deductions.
It’s almost as if the IRS is forcing some high earners to wear a pair of wedge heels as they try to play limbo. Even though they have the ability to win the game (in this analogy, winning the game means avoiding as much tax debt as possible), the IRS (and a few states: California, Colorado, Connecticut, Iowa, and Minnesota) wants to make it harder to reach low Flo-Rida levels.
Basically, it goes like this: there is the usual method of filing taxes and the “platform stub” method of alternative minimum tax. If the AMT method makes someone pay more taxes, so be it.
To find out if you need to pay AMT, you need to tally your taxes in the usual way and compare them side by side. The good news is that most tax filing software will automatically calculate whether you owe the AMT by running the AMT 6251 form in the background, even if you don’t realize it.
What the AMT was designed to do
In 1969, Secretary of the Treasury Joseph W. Barr testified before Congress. It revealed that 155 taxpayers with incomes over $200,000 in the 1966 tax year (equivalent to $1.72 million today) legally paid no federal income tax. . The American people were livid. In response, more people wrote to their representatives in Congress about it than about the Vietnam War, and the AMT was born.
The confusing rules around AMT are another reason why some people hate it. When the AMT is not indexed to inflation, it can also lead to bracket drift, when applied to highs (but not super highs), which can hurt upper middle income people.
Here is a quick overview of how taxes are normally calculated on your 1040:
- Find your total or gross income by adding together your earned (salaries, tips, commissions, and bonuses) and unearned (dividends, interest, and capital gains) income.
- Subtract deductions above the line (for example, HSA dues and student loan interest) to find your adjusted gross income (AGI).
- Take your other deductions, whether standard or itemized, to determine your taxable income.
- Multiply each bracket of your taxable income by its corresponding marginal tax rate. There are seven, ranging from 10% to 37%.
- Use tax credits to reduce your taxes owed or increase your refund.
- Ah dah! You now know how much your tax burden is!
… Okay, we all know taxes aren’t that simple. But to see if you’re in this alternative minimum tax boat, take a look at AMT exemptions. If your income is below the threshold for your filing status, you are probably safe:
- $72,900 for single or head of household
- $113,400 for marriages filed jointly
- $56,700 for married filing separately
The AMT can get VERY complicated, but it’s roughly calculated like this on your AMT 6251 form:
- Start with your taxable income that you calculated before on your 1040.
- Add or reduce tax preferences such as Standard Deduction and other forms of income such as Incentive Stock Option Spread (ISO) to get your Alternative Minimum Taxable Income (AMTI).
- Subtract the AMT exemption listed above that corresponds to your tax filing status, the same way you would with the standard deduction. This exemption is being phased out for single filers above $523,600 of income and married filers jointly filing at $1,047,200 of income.
- Multiply the remaining amount by the appropriate tax rate:
- 26% for AMTI below $197,700
- 28% for AMTI over $197,700
- This gives you your provisional minimum tax. If it is higher than the calculation made with the “normal” method to determine your tax payable, then that is what you owe. Dah dah?
When you are likely to pay the AMT
So if your income is higher than the exemptions, does that mean that you automatically owe the AMT and that you have to practice walking in heels? Probably not.
According to the Tax Policy Center, AMT affected only 0.1% of all U.S. households in 2019. The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the number of people subject to AMT because it increased the AMT exemption from $54,300 to $72,900 for single filers and from $84,500 to $113,400 for married filers.
However, unless there is legislation to extend the changes the TCJA has made to the exemption, the AMT will apply to about 3.7% of taxpayers (still few) in 2026.
There are conditions where you may be more likely to owe AMT. They are:
- If you make a LOT of money and/or realize a large capital gain that pushes you above the transition income amounts.
- Exercise of stock options. With normal tax calculations, stocks are not taxed until you sell them. However, the AMT treats the difference between your strike price and the stock’s fair market value, or “spread”, as income, which increases your AMTI.
At the end of the line
The AMT is a headache that adds more rules to an already unruly tax code. Be sure to consult tax preparation software or a tax professional to see if this applies to you. While it probably isn’t, that doesn’t mean it’s not worth checking out.