Alternative minimum tax
The alternative minimum tax (AMT) is a parallel federal income tax computation in the United States that ensures taxpayers with high economic income cannot reduce their tax liability below a specified minimum through excessive use of deductions, exclusions, and credits allowed under the regular tax system.[1] Enacted in 1969 as part of the Tax Reform Act to address wealthy individuals avoiding taxes via preferential items like accelerated depreciation and certain investment incentives, the AMT requires taxpayers to calculate an alternative minimum taxable income (AMTI) by disallowing or adjusting such preferences, then apply flat tax rates of 26% and 28% to derive a tentative minimum tax, paying the excess over regular tax liability.[2][3] Over decades, the AMT's failure to adjust for inflation expanded its reach to middle-income households with multiple dependents or in high-tax states, leading to compliance complexities and unintended burdens on non-wealthy filers.[4] The 2017 Tax Cuts and Jobs Act temporarily raised exemption thresholds and phaseouts, sharply reducing affected taxpayers to primarily the upper-income brackets through 2025, though expiration could revert prior trends absent further legislation.[5] A distinct corporate AMT, imposing a 15% minimum on adjusted financial statement income for large corporations, was repealed in 2017 but reinstated via the 2022 Inflation Reduction Act to target book-tax disparities.[6] Debates persist over the AMT's efficacy in curbing avoidance versus its distortions, administrative costs, and potential to undermine regular tax incentives, with critics arguing it duplicates effort without proportional revenue gains relative to complexity imposed.[7]Definition and Purpose
Core Mechanism and Objectives
The alternative minimum tax (AMT) operates as a parallel federal income tax computation for certain U.S. taxpayers, requiring them to calculate their liability under both regular tax rules and AMT rules, then pay the higher amount.[1] This mechanism begins with alternative minimum taxable income (AMTI), derived from regular taxable income by adding back specified tax preferences and exclusions—such as state and local tax deductions, certain miscellaneous itemized deductions, incentive stock option exercises, and accelerated depreciation on property placed in service after 1986.[1] From AMTI, taxpayers subtract an exemption amount (e.g., $85,700 for single filers and $133,300 for married filing jointly in 2024, subject to phaseouts starting at $609,350 and $1,218,700 of AMTI, respectively), then apply flat rates of 26% on the first $232,600 of taxable AMTI (after exemption) and 28% thereafter for 2024, yielding a tentative minimum tax.[8] The AMT equals the excess of this tentative amount over the regular tax liability (excluding certain credits).[9] The primary objective of the AMT is to impose a minimum tax floor on individuals with substantial economic income who might otherwise reduce their regular tax to zero or near-zero through legal deductions, credits, and exclusions, thereby ensuring they contribute at least a baseline amount to federal revenues.[1] Enacted to address perceived inequities where high earners exploited loopholes—such as those highlighted in 1969 Treasury reports showing 155 high-income returns with zero liability—the AMT targets "taxpayer benefits" that disproportionately shelter economic income.[10] By disallowing or recapturing these preferences, it promotes a broader tax base aligned more closely with actual economic capacity, though critics from tax policy analyses argue it deviates from pure income taxation by incorporating elements akin to a flat tax on modified gross income.[9] This structure aims to curb aggressive avoidance strategies without fully repealing incentives, reflecting a compromise between revenue protection and economic policy goals.[11]First-Principles Rationale
The alternative minimum tax (AMT) rests on the foundational principle of vertical equity in taxation, which posits that individuals with greater economic capacity should bear a proportionally larger tax burden to fund public goods and maintain fiscal sustainability.[12] This principle addresses the causal reality that complex tax codes with numerous preferences—intended to incentivize behaviors like investment or charitable giving—can enable high-income taxpayers to minimize or eliminate their liabilities through legal deductions, exemptions, and credits, thereby undermining the revenue base and shifting burdens to others.[13] By imposing a parallel calculation on a broader income base with reduced allowances, the AMT functions as a backstop mechanism to ensure that taxpayers with substantial resources contribute at least a baseline amount, reflecting their ability to pay as measured by economic income rather than accounting maneuvers.[14] At its core, the AMT embodies a commitment to causal realism in tax policy: preferences distort behavior productively only if they do not erode the overall system's integrity, as unchecked avoidance leads to revenue shortfalls that necessitate either deficit spending or broader rate increases, distorting incentives further.[2] Empirical evidence from the 1960s, when a Treasury study revealed 155 high-income individuals paying no federal income tax despite aggregate earnings exceeding $200,000 annually (equivalent to over $1.8 million in 2023 dollars), underscored this vulnerability, prompting the AMT's design to recapture revenue from sheltered income without repealing incentives outright.[15] This approach allows lawmakers to pursue horizontal equity—treating similar economic positions comparably—while preserving vertical progressivity, as the AMT's flat rates (historically 15% initially, later adjusted) apply only after exceeding exemptions calibrated to target the upper income strata.[16] Critically, the rationale prioritizes empirical outcomes over ideological purity: a tax system without such a minimum risks systemic erosion, where sophisticated actors exploit asymmetries in information and complexity to achieve effective rates far below those of average earners, fostering perceptions of unfairness that erode compliance and political support for taxation.[4] Proponents argue this mechanism sustains the social contract underlying progressive taxation, ensuring that economic power correlates with fiscal responsibility, though it assumes deductions often overstate true ability to pay—a contestable claim rooted in debates over income realization versus accrual.[17] In practice, the AMT's structure reflects a pragmatic balance, enabling targeted relief in the regular code while enforcing a floor informed by comprehensive income metrics, thereby mitigating the deadweight losses from either overly punitive uniformity or unchecked favoritism.[13]Historical Development
Origins and Early Implementation (1969–1986)
The origins of the Alternative Minimum Tax (AMT) trace to mid-20th-century concerns that certain high-income individuals were evading substantial federal income tax liability through aggressive use of deductions and exclusions, often characterized as tax preferences or shelters. A 1969 report by the U.S. Department of the Treasury highlighted that 155 taxpayers with adjusted gross income over $200,000 had paid no federal income tax in 1967, despite substantial economic income, fueling calls for reform to ensure a minimum tax burden on the wealthy.[2] This led Congress to enact the individual minimum tax as part of the Tax Reform Act of 1969 (P.L. 91-172, signed December 30, 1969), imposing a flat 10% add-on tax on specified tax preference items exceeding the taxpayer's regular tax liability.[7] The provision targeted items such as accelerated depreciation on real property, amortization of child care facilities, excess investment interest, and percentage depletion allowances for natural resources, aiming to claw back benefits from these incentives without fully repealing them.[16] Under the 1969 framework, the minimum tax was computed by adding back disallowed preferences to taxable income, applying the 10% rate, and then crediting the full regular tax paid against this amount; any excess represented additional liability.[7] This add-on design preserved the regular tax system's structure while enforcing a floor, reflecting a compromise between eliminating preferences outright—which might deter investment—and allowing complete avoidance, which undermined perceived tax equity.[16] Exemptions applied for low-income taxpayers, and the tax applied only to individuals, with corporate parallels emerging later. Initial implementation affected a narrow group, primarily affluent users of shelters like oil and gas investments or real estate depreciation, generating limited revenue but signaling congressional intent to curb zero-tax outcomes among the top earners.[2] Subsequent adjustments refined the mechanism without altering its core add-on nature. The Tax Reform Act of 1976 (P.L. 94-455) raised the rate to 15% and expanded preferences to include certain state and local tax deductions, intangible drilling costs, and excess itemized deductions, broadening the base to capture more shelter activity.[7] The Revenue Act of 1978 (P.L. 95-600) made further tweaks, such as indexing some components for inflation and adjusting exclusions, while the Economic Recovery Tax Act of 1981 (P.L. 97-34) introduced temporary relief for certain incentives but preserved the minimum tax's reach.[7] Through the early 1980s, the regime remained focused on high-income filers, with taxpayer numbers staying low—typically under 20,000 annually—due to high exemption thresholds and the concentration of preferences among the wealthy; however, unindexed brackets and falling top marginal rates (from 70% in 1981 to 50% by 1982, then 28% by 1986) gradually exposed more moderate earners to potential liability as inflation eroded real income thresholds.[2] This early phase demonstrated the provision's effectiveness in targeting avoidance but sowed seeds for later complexity, as regular tax cuts amplified the add-on's bite without corresponding AMT adjustments.[16]Tax Reform Act of 1986 and Subsequent Adjustments
The Tax Reform Act of 1986 (TRA 1986) replaced the prior add-on minimum tax with a parallel tax system for both individuals and corporations, aiming to ensure a minimum level of tax payment while broadening the regular tax base by curtailing many deductions and preferences. For individuals, it established a 21% flat rate on alternative minimum taxable income (AMTI), which included adjustments such as adding back certain itemized deductions (e.g., state and local taxes), accelerating income from incentive stock options, and depreciating assets more slowly than under regular rules; it also introduced an exemption amount of $40,000 for married filing jointly ($30,000 for singles), subject to phaseout for higher earners above $150,000 ($112,500 for singles).[2][18] The corporate AMT imposed a 20% rate on AMTI after adjustments like disallowing net operating loss carryovers beyond 90% of AMTI and adding back certain book-tax differences, effectively shifting some tax-sheltering incentives into the AMT regime as regular tax rates dropped to a maximum 34%.[19][12] This reform reduced the number of affected taxpayers initially by aligning regular and AMT bases more closely, though it preserved the AMT's role in capturing revenue from preferences not fully eliminated.[20] Subsequent legislation adjusted the AMT to address revenue needs and perceived inequities. The Revenue Reconciliation Act of 1990 raised the individual AMT rate to 24% effective for tax years beginning after December 31, 1990, without altering exemptions or phaseouts significantly, thereby increasing the minimum tax burden on high-income filers with substantial preferences.[18] The Omnibus Budget Reconciliation Act of 1993 further modified the individual AMT by introducing a tiered rate structure—26% on AMTI up to $175,000 (adjusted for inflation) and 28% thereafter—effective for tax years after December 31, 1993; it also increased the exemption to $45,000 for joint filers ($33,750 for singles) but tied phaseouts more closely to regular income levels, while repealing the AMT preference for certain circulation expenditures and intangible drilling costs to simplify compliance.[18][21] For corporations, the 1993 act adjusted AMT credits and carryforwards but retained the core 20% rate, with minor tweaks to book income adjustments amid ongoing debates over its distortion of investment decisions.[22] These changes reflected congressional efforts to balance deficit reduction with base-broadening, yet they inadvertently expanded AMT exposure over time as inflation eroded exemption thresholds without annual indexing until later years, and as regular tax cuts in the 1990s interacted with unadjusted AMT parameters to pull middle- to upper-middle-income taxpayers into the regime, particularly those in high-tax states claiming large state and local deductions.[23] Empirical data from the period show AMT payers rising from about 100,000 in 1987 to over 200,000 by 1997, generating roughly 1-2% of individual income tax revenue annually, underscoring the AMT's growing fiscal role despite its original intent to target only the wealthiest with aggressive sheltering.[24]Pre-TCJA Expansions and "Patch" Legislation
Following the Tax Reform Act of 1986, which established the modern individual alternative minimum tax (AMT) with fixed exemption amounts of $40,000 for married couples filing jointly and $30,000 for single filers, the lack of inflation indexing for exemptions and phaseout thresholds led to a gradual expansion in the number of taxpayers subject to the AMT.[24] This structural feature caused AMTI thresholds to erode in real terms over time, increasing the tax's reach beyond its original intent of targeting high-income individuals exploiting preferences. The Omnibus Budget Reconciliation Act of 1993 partially mitigated this by raising exemptions to $45,000 for joint filers and $33,750 for singles effective after 1992, but the absence of ongoing indexing continued to broaden applicability, with fewer than 1 million taxpayers affected annually through the late 1990s.[24][25] The expansion accelerated after the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which reduced regular income tax rates without corresponding adjustments to the flat AMT rates of 26% and 28%, projecting up to 17 million additional taxpayers ensnared by 2010 absent intervention.[25] EGTRRA itself provided temporary relief by increasing exemptions—for instance, to approximately $49,000 for joint filers initially—and allowing partial deductions for certain state and local taxes, but these measures expired after 2002, exacerbating the creep.[18] The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) further cut regular rates to as low as 15% on ordinary income, widening the gap with AMT liability and prompting projections of 30 million affected taxpayers by the late 2000s without patches; it extended some EGTRRA relief but tied extensions to broader Medicare legislation, such as the 2003 Medicare Prescription Drug, Improvement, and Modernization Act, which included a one-year AMT exemption boost.[25][26] To counteract this unintended broadening—primarily impacting middle- and upper-middle-income families with multiple dependents, itemized deductions, or state taxes rather than the ultra-wealthy—Congress enacted repeated "patch" legislation from 2003 to 2016, typically increasing exemptions temporarily to cap affected filers at 4-5 million annually.[27][25] Key patches included the 2006 Tax Increase Prevention and Reconciliation Act, which extended higher exemptions for that year; year-end extensions in 2007 setting joint exemptions at $66,250; the 2009 American Recovery and Reinvestment Act and 2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, which raised amounts to around $70,000 for joint filers; and the 2012 American Taxpayer Relief Act (ATRA), responding to fiscal cliff concerns, which set 2012 exemptions at $78,750 for joint filers and $50,600 for singles while introducing inflation indexing starting in 2013.[24][28] Later measures, such as the 2014 Tax Increase Prevention Act and the 2015 Protecting Americans from Tax Hikes (PATH) Act, extended indexed exemptions through 2016 at levels approaching $83,600 for joint filers, preventing a revert to unadjusted 1993 figures but deferring permanent reform due to revenue scoring constraints under pay-as-you-go rules.[25] These patches, often retroactive and attached to must-pass bills, maintained the AMT's focus on higher earners but highlighted its complexity, with affected taxpayers rising to 5.2 million by 2017 despite interventions.[25][29]Tax Cuts and Jobs Act of 2017 Reforms
The Tax Cuts and Jobs Act (TCJA), signed into law by President Donald Trump on December 22, 2017, permanently repealed the corporate alternative minimum tax (AMT), eliminating the 20% minimum tax on corporate alternative minimum taxable income that had been in place since 1986.[30][31] This repeal applied to tax years beginning after December 31, 2017, and was projected to reduce federal revenues by approximately $40 billion over the 2018–2027 period, reflecting the relatively low revenue yield of the corporate AMT due to its narrow base and interactions with regular corporate tax rules.[29] The change simplified corporate tax compliance by removing the need to compute and reconcile dual tax systems, though it allowed corporations to claim refunds for prior-year AMT credits on an accelerated schedule through 2021.[32] For individual taxpayers, the TCJA retained the AMT but substantially narrowed its applicability through temporary increases in exemption amounts and phaseout thresholds, effective for tax years 2018 through 2025. The AMT exemption rose to $70,300 for single filers and $109,400 for married couples filing jointly in 2018 (with annual inflation adjustments thereafter), compared to pre-TCJA levels of $54,300 for singles and $84,500 for joint filers in 2017.[29][31] Phaseout thresholds were elevated to $500,300 for singles and $1,000,600 for joint filers in 2018 (also inflation-adjusted), up from roughly $120,700 and $160,900 pre-TCJA, phasing out the exemption at a 25% rate once exceeded.[30] These adjustments, combined with the suspension of personal exemptions and limitations on state and local tax deductions under regular tax rules, aligned regular and AMT computations more closely for many filers, reducing the add-back of preferences like property taxes.[30] The reforms scaled back several AMT preferences and adjustments, such as excluding certain miscellaneous itemized deductions and altering the treatment of incentive stock options, further limiting the tax's reach.[30] As a result, the number of individual taxpayers subject to the AMT dropped sharply from about 5 million in 2017 to an estimated 200,000 in 2018, primarily sparing upper-middle-income households with multiple dependents or high state taxes while preserving the AMT for ultra-high-income individuals exploiting large deductions.[33] The individual provisions are scheduled to sunset after 2025, reverting to pre-TCJA inflation-adjusted levels unless extended by Congress, potentially exposing millions more filers to the tax amid ongoing debates over its equity and complexity.[29][34]Inflation Reduction Act of 2022 and Corporate AMT
The Inflation Reduction Act of 2022 (IRA), signed into law by President Joseph Biden on August 16, 2022, enacted a new Corporate Alternative Minimum Tax (CAMT) under Internal Revenue Code Section 55 as amended.[6] This provision targets large corporations by imposing a 15% minimum tax on their adjusted financial statement income (AFSI), which is derived from financial statements prepared under U.S. GAAP or IFRS, with specific adjustments to align more closely with taxable income concepts.[6][35] The CAMT applies only to "applicable corporations," defined as those with average annual AFSI exceeding $1 billion over the three preceding tax years (excluding certain small corporations or those meeting de minimis exceptions).[6][36] For U.S. corporations that are members of foreign-parented groups, an additional aggregate AFSI threshold of $100 million applies to the controlled group.[35][37] The CAMT liability equals the excess (if any) of 15% of AFSI over the corporation's regular tax liability, adjusted by subtracting certain credits (such as foreign tax credits and general business credits) but before adding the CAMT itself.[6][36] This structure ensures the tax functions as a true minimum, preventing regular tax strategies from reducing effective rates below 15% on AFSI, while allowing offsets from non-CAMT credits to mitigate double taxation.[38] The provision became effective for tax years beginning after December 31, 2022, with initial IRS guidance issued in 2023 clarifying AFSI computations, such as treatment of depreciation, research expenditures, and loss carryforwards.[39] Subsequent notices in 2024 and 2025 provided interim relief on compliance burdens, including simplified filing for certain entities.[40][41] Legislators framed the CAMT as a response to empirical observations that some profitable corporations reported substantial book income to shareholders yet paid minimal federal income tax due to deductions, credits, and timing differences under the Tax Cuts and Jobs Act of 2017.[38][42] For instance, analyses of 2021 data showed approximately 20-30 U.S. corporations with over $1 billion in book income facing effective rates under 15%, though the CAMT's AFSI adjustments (e.g., adding back certain foreign-derived intangible income deductions) limit its reach compared to raw book profits.[43][38] Critics, including some tax policy experts, argue the tax overlooks underlying incentives for low regular-tax payments—such as accelerated depreciation and R&D expensing—which reflect congressional policy choices rather than evasion, potentially distorting investment signals without addressing root causes.[42] The IRA passed via budget reconciliation with solely Democratic support in Congress, amid debates over its projected revenue (estimated at $222 billion over 10 years by the Joint Committee on Taxation) and potential to increase compliance costs for affected firms.Individual AMT Mechanics
Calculation Framework
The individual alternative minimum tax (AMT) is imposed as the excess of the tentative minimum tax over the taxpayer's regular tax liability for the taxable year.[44] The tentative minimum tax equals the alternative minimum taxable income (AMTI), reduced by the AMT exemption amount, multiplied by the applicable AMT rates, and further reduced by the AMT foreign tax credit.[44][3] AMTI begins with the taxpayer's regular taxable income from Form 1040 and incorporates mandatory adjustments under Internal Revenue Code (IRC) section 56, plus tax preference items under section 57.[44][3] Key adjustments to compute AMTI include adding back itemized deductions for state and local taxes, miscellaneous itemized deductions subject to the 2% floor, and investment interest expense exceeding the AMT limitation; recapturing excess depreciation allowances using alternative depreciation systems like the alternative depreciation system (ADS); and including income from incentive stock option exercises.[3] Tax preferences added to AMTI encompass interest on private activity bonds excluded from gross income under regular tax rules and a portion of depletion deductions exceeding 50% of the property's adjusted basis.[3] Negative adjustments may apply in limited cases, such as certain net operating loss deductions computed under AMT rules.[3] These modifications aim to broaden the tax base by disallowing or recapturing benefits that reduce regular tax liability disproportionately for certain high-income taxpayers.[44] The resulting AMTI is reduced by the AMT exemption, which for tax year 2025 is $88,100 for single filers and heads of household, $137,000 for married filing jointly, and $68,500 for married filing separately.[45] This exemption phases out by 25% of the amount by which AMTI exceeds $626,350 for single filers and heads of household or $1,252,700 for married filing jointly (with half those thresholds for married filing separately).[46][47] The taxable excess (AMTI minus exemption) is then taxed at a 26% rate on the first $239,100 (or $119,550 for married filing separately), with a 28% rate on the amount exceeding that threshold; these bracket thresholds are adjusted annually for inflation from the statutory base amounts in IRC section 55(b)(1)(A).[48][44] The tentative minimum tax is this product minus the AMT foreign tax credit under IRC section 59(a).[44][3] The final AMT equals the tentative minimum tax minus the regular tax before credits (as defined in IRC section 55(c)(1)), but not below zero; this amount is added to the regular tax to determine total tax liability.[44][3] Taxpayers compute this via IRS Form 6251, which itemizes the adjustments and applies the formula line-by-line, starting from Form 1040 taxable income on line 1 and culminating in the AMT on line 11.[3] Certain credits, such as the foreign tax credit, are limited under AMT rules to prevent double benefits.[3]Key Adjustments, Preferences, and Exemptions
Alternative minimum taxable income (AMTI) for individuals is computed by modifying federal taxable income through mandatory adjustments under Internal Revenue Code (IRC) § 56 and the addition of tax preference items under IRC § 57. Adjustments typically reflect timing differences in income recognition or deduction timing between regular tax and AMT rules, such as alternative depreciation methods or net operating loss limitations, while preferences involve permanent exclusions from regular taxable income, like certain tax-exempt interest. These modifications aim to broaden the tax base by recapturing benefits that might otherwise reduce regular tax liability disproportionately.[49][50][3] Prominent adjustments include the add-back of state and local taxes deducted under regular rules (from Schedule A, line 7, or the standard deduction if applicable), differences in investment interest expense (using Form 4952 with AMT limitations), and alternative net operating loss deductions capped at 90% of AMTI (or 100% for qualified disaster losses). Depreciation for post-1986 property uses the alternative depreciation system (e.g., 150% declining balance over longer recovery periods), requiring subtraction of the regular tax depreciation amount if the AMT figure is lower. Incentive stock option exercises trigger inclusion of the bargain element (fair market value minus exercise price), and passive activity losses or at-risk limitations are recalculated under AMT rules, often resulting in smaller loss allowances. Other adjustments encompass intangible drilling costs (limited to 65% of net income from the property), research and experimental expenditures (amortized over 10 years), and mining exploration costs (amortized over 10 years).[3][48] Tax preference items, which are added without offset against other income, primarily consist of tax-exempt interest income from specified private activity bonds (under IRC § 57(a)) and the excess of percentage depletion over the adjusted basis for certain mineral properties (under IRC § 57(b)). An additional preference applies to 7% of gains excluded from regular tax on qualified small business stock under IRC § 1202. The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated several former triggers, such as the add-back for miscellaneous itemized deductions (suspended for regular tax) and personal exemptions (also suspended), substantially narrowing the scope of adjustments for many taxpayers, though core items like state and local taxes and incentive stock options persist.[3][30] After computing AMTI, an exemption amount is subtracted to arrive at the AMT base, subject to phaseout for higher-income filers. For tax year 2024, the exemption is $85,700 for single filers or heads of household, $133,300 for married filing jointly or qualifying surviving spouses, and $66,650 for married filing separately, with phaseout beginning at $609,350 AMTI for singles ($1,218,700 for joint filers) and reducing the exemption by 25% of the excess AMTI. These amounts are inflation-adjusted annually; for tax year 2025, they rise to approximately $88,100 for unmarried filers, $137,000 for joint filers, and $68,500 for married filing separately, with corresponding phaseout thresholds scaled upward. The exemption fully phases out at roughly four times the starting threshold, ensuring no exemption for very high AMTI levels.[3][48]Phaseouts, Rates, and Credits
The alternative minimum tax (AMT) exemption phases out for taxpayers with alternative minimum taxable income (AMTI) exceeding inflation-adjusted thresholds, reducing the allowable exemption by $0.25 for each $1 of AMTI above the threshold, or a 25% phaseout rate.[51][25] For tax year 2025, the exemption amounts are $88,100 for single filers and heads of household, $137,000 for married couples filing jointly, and $68,500 for married filing separately; phaseout thresholds begin at $626,350 for single filers and heads of household, $1,252,700 for married filing jointly, and $626,350 for married filing separately.[46][52] These thresholds and amounts are adjusted annually for inflation under Internal Revenue Code provisions, with the phaseout fully eliminating the exemption once AMTI reaches approximately four times the initial threshold due to the 25% reduction rate.[1] The tentative minimum tax rate structure consists of 26% applied to AMTI (after exemption and certain deductions) up to an inflation-adjusted amount, with 28% applying to the excess; this creates a maximum marginal AMT rate of 28%, though the phaseout effectively raises the top rate to 35% for affected taxpayers.[8][53] For tax year 2024, the 26% bracket threshold was $232,600 for unmarried filers ($116,300 for married filing separately), rising to 28% thereafter; the 2025 threshold follows a similar inflation adjustment, estimated around $238,000 based on prior-year patterns.[48] Capital gains and qualified dividends retain preferential rates under AMT calculation if lower than the 26%/28% brackets.[1] Credits against AMT liability are limited compared to regular tax, with most personal nonrefundable credits (e.g., child tax credit, education credits) allowable only to the extent they do not exceed the excess of tentative minimum tax over regular tax.[53] The primary credit mechanism is the minimum tax credit under IRC §53, which refunds prior-year AMT payments attributable to timing differences (e.g., depreciation or incentive stock options) over future years when regular tax exceeds tentative minimum tax, subject to a 20% annual limit relative to net regular tax liability above AMT. Foreign tax credits are partially allowable against AMT after adjustments, but other credits like the earned income tax credit are disallowed entirely.[1] This credit framework aims to mitigate the AMT's permanent impact from deferred preferences while preventing indefinite carryforwards.[48]Illustrative Example
Consider a hypothetical single taxpayer filing for the 2025 tax year with adjusted gross income (AGI) of $250,000, who itemizes deductions including $25,000 in state and local taxes paid, which are allowable under regular tax rules but added back for AMT purposes.[3] The taxpayer's regular taxable income, after standard or itemized deductions and exemptions, is $200,000, resulting in a regular federal income tax liability of $38,000 after applying progressive rates and credits.[3] For AMT computation using Form 6251, alternative minimum taxable income (AMTI) begins with regular taxable income and adds back the $25,000 state tax deduction, yielding AMTI of $225,000; no other significant adjustments or preferences (such as incentive stock option exercises or accelerated depreciation) apply in this scenario.[3][1] The AMT exemption for a single filer in 2025 is $88,100, which phases out by 25% of the amount by which AMTI exceeds $626,350; here, AMTI is below the phaseout threshold, so the full exemption applies, reducing AMTI to $136,900 for tentative minimum tax calculation.[3][54] AMT rates are 26% on the first $232,600 of this amount (inflation-adjusted threshold for 2025) and 28% thereafter; thus, tentative minimum tax is 26% of $136,900, or $35,594.[3] Since this exceeds the regular tax of $38,000? Wait, in this setup regular is higher, so no AMT due; adjust for trigger. To illustrate AMT applicability, modify: assume the taxpayer exercises incentive stock options (ISOs) generating $50,000 in bargain element income excluded from regular taxable income but treated as a preference for AMT, increasing AMTI to $275,000.[3] Exemption remains $88,100 (still below phaseout), so AMT base is $186,900. Tentative minimum tax: 26% of $186,900 = $48,594.[3] With regular tax at $38,000, the AMT liability is the excess: $48,594 minus $38,000 = $10,594, paid in addition to regular tax.[3] This demonstrates how AMT preferences like ISO exercises can trigger liability by broadening the income base.[1]| Step | Description | Amount |
|---|---|---|
| 1. Regular Taxable Income | Base from Form 1040 | $200,000[3] |
| 2. Add AMT Adjustments (e.g., state taxes) | Disallowed deductions | +$25,000[3] |
| 3. Add AMT Preferences (e.g., ISO bargain element) | Excluded income items | +$50,000[3] |
| 4. AMTI | Sum of above | $275,000 |
| 5. Subtract Exemption | $88,100 for single filer (2025) | -$88,100[55] |
| 6. AMT Base | Result | $186,900 |
| 7. Tentative Minimum Tax | 26% rate applied | $48,594[3] |
| 8. Regular Tax Liability | From Form 1040 | $38,000 |
| 9. AMT Due | Excess of tentative over regular (if positive) | $10,594[3] |