The Alternative Minimum Tax, commonly called AMT, is one of those tax terms that many people have heard of, but few fully understand.
For some, it sounds like a penalty. For others, it is simply confusing. In reality, AMT affects a very small percentage of households, but for those it does impact, understanding how it works is essential.
AMT was created in the 1960s after Congress discovered that some high-income taxpayers were paying little or no income tax because they took advantage of deductions and loopholes available at the time. To create greater fairness, a parallel tax system was introduced. Today, when you file your taxes, two calculations are essentially being run at once. One through the regular tax system, and one through the AMT system. You pay whichever number is higher.
While AMT may sound intimidating, it applies only to specific situations. It generally affects high earners with large deductions, significant state and local taxes, or unique adjustments to income. Exercising incentive stock options can also trigger AMT exposure. But the income thresholds are substantial. For single filers, the exemption begins phasing out once Alternative Minimum Taxable Income reaches $626,350. For married couples filing jointly, phase-out begins around $1,252,700. These figures mean that most taxpayers will never come anywhere near the AMT window.
For those who are impacted, the difference between the regular tax system and AMT lies in how deductions and exemptions are handled. Under AMT, several common deductions are reduced or removed. For 2025, the AMT exemption is $88,100 for single filers and $137,000 for married couples filing jointly. These exemptions begin to phase out once income crosses the thresholds mentioned above. As deductions fall away, taxable income rises, and the AMT tax rate applies. That rate starts at 26 percent and increases to 28 percent for higher levels of AMT income. For families accustomed to using certain deductions under the regular system, this shift can result in a noticeably higher tax bill.
Although AMT applies to a small portion of the population, planning remains important for anyone who might be close to the thresholds. Wise investors should keep the following key concepts in mind:
- Understand whether your income or deductions put you near the AMT phase-out ranges.
- Review how stock option exercises, property taxes, or large itemized deductions could affect your AMT exposure.
- Keep track of which deductions may be limited under AMT compared to the regular tax system.
- Look ahead when income is expected to rise, especially if wages, bonuses, or investment income fluctuate from year to year.
- Coordinate tax strategies early since adjustments often require planning across multiple years.
AMT is designed to ensure that individuals with high income pay a minimum level of tax, but it is not intended to surprise people who are simply following the rules. For those who do fall under AMT, careful planning and awareness of how income is recognized can help reduce unnecessary strain. Because AMT affects long-term tax strategy rather than a single year, it is important to evaluate how income, deductions, and timing decisions interact over time.
Understanding the rules, and knowing how and when they apply, is a meaningful advantage. AMT may only impact a small portion of taxpayers, but for those in its path, clarity and planning can make the process far less overwhelming. If you are unsure whether AMT could affect your situation, or if your income and deductions are starting to drift near the thresholds, reach out to a fiduciary financial advisor who can help you evaluate your options and build a plan with your best interests at heart.
Financial Enhancement Group is an SEC Registered Investment Advisor.
