Alternative minimum tax

The alternative minimum tax is a tax imposed by the United States federal government in addition to the regular income tax for certain individuals, estates, and trusts. As of tax year 2018, the AMT raises about $5.2 billion, or 0.4% of all federal income tax revenue, affecting 0.1% of taxpayers, mostly in the upper income ranges.
An alternative minimum taxable income is calculated by taking the ordinary income and adding disallowed items and credits such as state and local tax deductions, interest on private-activity municipal bonds, the bargain element of incentive stock options, foreign tax credits, and home equity loan interest deductions. This broadens the base of taxable items. Many deductions, such as mortgage home loan interest and charitable deductions, are still allowed under AMT. The AMT is then imposed on this AMTI at a rate of 26% or 28%, with a much higher exemption than the regular income tax.
The Tax Cuts and Jobs Act of 2017 reduced the fraction of taxpayers who owed the AMT from 3% in 2017 to 0.1% in 2018, including from 27% to 0.4% of those earning $200,000 to $500,000 and from 61.9% to 2% of those earning $500,000 to $1,000,000.
The major reasons for the reduction of AMT taxpayers after TCJA include the capping of the state and local tax deduction by the TCJA at $10,000, and a large increase in the exemption amount and phaseout threshold. A married couple earning $200,000 now requires over $50,000 of AMT adjustments to begin paying the AMT. The AMT previously applied in 2017 and earlier to many taxpayers earning from $200,000 to $500,000 because state and local taxes were fully deductible under the regular tax code but not at all under AMT. Despite the cap of the SALT deduction, the vast majority of AMT taxpayers paid less under the 2018 rules.
The AMT was originally designed to tax high-income taxpayers who used the regular tax system to pay little or no tax. Due to inflation and cuts in ordinary tax rates, a larger number of taxpayers began to pay the AMT. The number of households owing AMT rose from 200,000 in 1982 to 5.2 million in 2017, but was reduced back to 200,000 in 2018 by the TCJA.

Alternative minimum tax calculation

Each year, high-income taxpayers must calculate and then pay the greater of an alternative minimum tax or regular tax. The alternative minimum taxable income is calculated by taking the taxpayer's regular income and adding on disallowed credits and deductions such as the bargain element from incentive stock options, state and local tax deduction, foreign tax credits, and passive activity losses. The amount of the AMTI then determines how much of the exemption can be taken, which is subtracted from the AMTI. Finally, the AMTI minus the exemption is taxed at 26% or 28% depending on the level of income.
Table of 2025 AMT tax rates and exemptions for AMT income:

Status	Single	Married filing jointly	Married filing separately	Trust
26% tax rate	$0-$239,100	$0-$239,100	$0-$119,550	$0-$239,100
28% tax rate	$239,100+	$239,100+	$119,550	$239,100+
Exemption amount	$88,100	$137,000	$68,650	$25,000
Exemption phase-out starts at	$626,350	$1,252,700	$626,350	$83,500
No more exemption at	$978,750	$1,800,700	$900,950	$183,500
Long-term capital gains rate	0%, 15%, 20%	0%, 15%, 20%	0%, 15%, 20%	0%, 15%, 20%

Example calculation

Alice is a single taxpayer who earns $100,000 of W-2 wage income in 2019. She also exercised and held 800 incentive stock options each for her employer, with a strike price of $100 and a current fair market value of $200. She thus incurs an additional $80,000 of bargain element that is not taxed under ordinary income, but is added to AMT income. She has no itemized deductions.
Alice thus must calculate income taxes twice:
Ordinary taxation
Alice calculates $15,246 in ordinary federal income taxes on $100,000: $100,000 - $12,200 standard deduction = $87,800 taxable income, at ordinary rates of 10%, 12%, 22%, 24%, would pay $15,246.50 in taxes.
Alternative minimum taxation

Alice takes her $100,000 ordinary income
Adds all AMT adjustments and exclusions. Here, she has $80,000 of incentive stock option bargain element which is taxable under AMT but not ordinary income, to reach a $180,000 AMT income
Alice's AMTI of $180,000 is under the 2019 exemption phaseout of $510,300 for single taxpayers, so she is entitled to the full exemption amount of $71,700.
Alice reduces her $180,000 AMTI by the $71,700 exemption to have $108,300 income that is applied solely at the 26% tax rate for an AMT tax burden of $28,158.

Because Alice's AMT tax burden of $28,158 is greater than her ordinary tax burden of $15,246, she pays a total of $28,158 in federal taxes. Because ISO bargain element is a timing adjustment in AMT parlance, she is able to carry forward her $12,912 in AMT paid to tax year 2020 as a minimum tax credit, where she may receive a credit for the tax paid.

Specifics and adjustments

Due to the effect of the exemption phaseout, there are effective marginal tax rates of 32.5% and 35%. A lower tax rate continues to apply to long-term capital gains. While the TCJA amended exemptions and phaseouts for single and married filers, it did not change it for trusts.
Under the AMT the standard deduction does not apply, but the AMT exemption does. State, local, and foreign taxes are not deductible. However, most other itemized deductions apply at least in part. Significant other adjustments to income and deductions apply. Individuals must file IRS if they have any net AMT due. The form is also filed to claim the credit for prior year AMT.
Other adjustments in computing AMT include:

Miscellaneous itemized deductions are not allowed. These include all items subject to the 2% "floor", such as employee business expenses, tax preparation fees, etc.
The home mortgage interest deduction is limited to interest on purchase money mortgages for a first and second residence.
Medical expenses may be deducted only if they exceed 10% of Adjusted Gross Income, as compared to 7.5% for regular tax.
The bargain element of an incentive stock option when exercised and the stock is not sold in the same tax year, regardless of whether the stock can immediately be sold.

Many AMT adjustments apply to businesses. The adjustments tend to have the effect of deferring certain deductions or recognizing income sooner. These adjustments include:

Depreciation deductions must be computed using the straight line method and longer lives than may be used for regular tax.
Deductions for certain "preferences" are limited. These include deductions related to:
*circulation costs,
*mining costs,
*research and experimentation costs,
*intangible drilling costs, and
*certain amortization.
Certain income must be recognized earlier, including:
*long-term contracts and
*installment sales.

To the extent AMT exceeds regular Federal income, a future credit may be provided which can offset future regular tax to the extent AMT does not apply in a future year, if AMT is caused by timing adjustment items such as the exercise of ISOs. However, this credit is limited: see further details in the "AMT credit against regular tax" section.
Regular tax used as a basis for computing AMT is found on the following lines of tax return forms: individual Line 44, less foreign tax credit.
Certain other adjustments apply. In addition, a partner or shareholder's share of AMT income and adjustments flow through to the partner or shareholder from the partnership or S corporation.
AMT is reduced by a foreign tax credit, limited based on AMT income rather than regular taxable income. Certain specified business tax credits are allowed.

History

A predecessor "minimum tax" was enacted by the Tax Reform Act of 1969 and went into effect in 1970. Treasury Secretary Joseph Barr prompted the enactment action with an announcement that 155 high-income households had not paid a dime of federal income taxes. The households had taken advantage of so many tax benefits and deductions that they had reduced their tax liabilities to zero. Congress responded by creating an add-on tax on high-income households, equal to 10% of the sum of tax preferences in excess of $30,000 plus the taxpayer's regular tax liability.
The explanation of the 1969 Act prepared by Congress's Staff of the Joint Committee on Internal Revenue Taxation described the reason for the AMT as follows:

The prior treatment imposed no limit on the amount of income which an individual or corporation could exclude from tax as the result of various tax preferences. As a result, there were large variations in the tax burdens placed on individuals or corporations with similar economic incomes, depending upon the size of their preference income. In general, those individual or corporate taxpayers who received the bulk of their income from personal services or manufacturing were taxed at relatively higher tax rates than others. On the other hand, individuals or corporations which received the bulk of their income from such sources as capital gains or were in a position to benefit from net lease arrangements, from accelerated depreciation on real estate, from percentage depletion, or from other tax-preferred activities tended to pay relatively low rates of tax. In fact, many individuals with high incomes who could benefit from these provisions paid lower effective rates of tax than many individuals with modest incomes. In extreme cases, individuals enjoyed large economic incomes without paying any tax at all. This was true for example in the case of 154 returns in 1966 with adjusted gross incomes of $200,000 a year. Similarly, a number of large corporations paid either no tax at all or taxes which represented very low effective rates.

The AMT has undergone several changes since 1969. The most significant of those, according to the Joint Committee on Taxation, occurred under the Reagan era Tax Equity and Fiscal Responsibility Act of 1982. The law changed the AMT from an add-on tax to its current form: a parallel tax system. The current structure of the AMT reflects changes that were made by the 1982 law. However, participation and revenues from the AMT temporarily plummeted after the 1986 changes. Congress made other notable, but less significant, changes to the law in 1978, 1982, and 1986.
Further significant changes occurred as a result of the Omnibus Budget Reconciliation Acts of 1990 and 1993, which raised the AMT rate to 24% from the prior level of 21% and then to 26% and 28% for individual filers with incomes that exceeded $175,000. Now, some taxpayers who do not have very high incomes or participate in numerous special tax benefits and/or activities will pay the AMT.