Understanding the Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is a supplemental income tax imposed by the federal government to ensure that individuals, corporations, trusts, and estates that benefit from certain exclusions, deductions, or credits pay at least a minimum amount of tax. The AMT operates as a parallel tax system with its own set of rules for calculating taxable income, its own exemption amounts, and its own tax rates. If your AMT liability exceeds your regular tax liability, you pay the difference as additional tax.
The AMT was originally enacted as part of the Tax Reform Act of 1969 after it was revealed that 155 high-income taxpayers had used various tax breaks to completely eliminate their federal income tax liability. Over the decades, because the AMT exemption was not indexed to inflation until 2013, it began affecting millions of middle-class taxpayers. The Tax Cuts and Jobs Act of 2017 significantly reduced AMT exposure by increasing the exemption amount and the phase-out threshold, but the AMT still affects many taxpayers, particularly those who exercise incentive stock options.
After the TCJA, the taxpayers most at risk for AMT are those who exercise incentive stock options (ISOs), have large amounts of private activity bond interest, or have very high income with significant timing-based deduction differences between regular tax and AMT.
Step-by-Step AMT Calculation (Form 6251)
How to Calculate Your AMT
AMT Tax Rates and Brackets (2026)
| AMTI Above Exemption | Single Rate | MFJ Rate |
|---|---|---|
| First $232,600 (Single) / $232,600 (MFJ) | 26% | 26% |
| Above $232,600 | 28% | 28% |
| Long-term capital gains within AMT | 0% / 15% / 20% | 0% / 15% / 20% |
AMT Preference Items Explained
AMT preference items are specific deductions, exclusions, and income items that are treated differently under the AMT than under the regular tax system. Understanding which items trigger AMT is essential for tax planning. The most significant preference items include state and local tax deductions (which are completely disallowed under AMT), incentive stock option exercise spreads (the difference between fair market value and exercise price), private activity bond interest (tax-exempt under regular tax but taxable under AMT), and certain accelerated depreciation differences.
- SALT deduction: Fully added back for AMT; the $10,000 SALT cap under TCJA reduced this AMT trigger for many taxpayers
- ISO exercise spread: The bargain element is added to AMT income in the year of exercise, even though no cash is received
- Private activity bonds: Interest from certain municipal bonds is tax-exempt for regular tax but included in AMT income
- Depreciation: AMT may require slower depreciation methods for certain assets, creating a timing difference
- Passive activity losses: AMT has its own passive activity rules that may differ from regular tax
- Net operating losses: AMT NOL can only offset 90% of AMTI (not 100% as under regular tax for pre-2018 NOLs)
- 1Regular taxable income (after deductions): ~$217,000
- 2Add back SALT: +$20,000
- 3Add back ISO spread: +$100,000
- 4AMTI: $337,000
- 5AMT exemption (MFJ): $137,000 (no phase-out since $337,000 < $1,218,700)
- 6AMT base: $337,000 - $137,000 = $200,000
- 7Tentative minimum tax: $200,000 x 26% = $52,000
- 8AMT owed: $52,000 - $45,000 = $7,000
AMT Planning for Canadians
Canada has its own version of the minimum tax under Section 127.5 of the Income Tax Act. The Canadian minimum tax is calculated by adding back certain tax preferences (such as capital gains deductions, loss carryovers, and resource deductions), applying an exemption of $40,000, and taxing the result at a flat rate of 15%. Unlike the US AMT, the Canadian minimum tax generates a carryforward credit that can be used in the following seven years. In Budget 2024, the Canadian government proposed changes to increase the minimum tax rate to 20.5% and update the list of preference items, making it more impactful for high-income Canadians.
AMT calculations involve complex interactions between regular tax and AMT rules. The examples provided are simplified illustrations. Consult a licensed CPA or tax attorney for accurate AMT projections, especially before exercising incentive stock options or engaging in transactions involving private activity bonds.